Horngren’s Cost Accounting A Managerial Emphasis 17th Global Edition by Srikant M. Datar solution ma
(20 min.) The roles of chief financial officer (CFO) and controller
The roles of the CFO include:
Controllership – the CFO provides financial information for reports to managers and shareholders and oversees the overall operations of the accounting system.
Tax – the CFO plans all tax liabilities and receipts of the business including value added tax (VAT)
Treasury – the CFO oversees banking, short and long-term financing, investments and cash management of the business.
Risk management – the CFO manages the financial risk resulting from interest rate and exchange rate changes, and the management of the derivatives.
Investor relations – the CFO communicates with stakeholders of the organization including the shareholders, suppliers and investors.
Strategic planning – the CFO defines the financial strategy of the organization and allocates resources to implement such strategies.
The roles of the controller (also known as chief accounting officer) include:
Globally financial planning
Budget preparation
Managing working capital
Profitability reporting
Subsidiary and liaison accounting
Figure 1: Flowchart indicating the roles and relationship between CFO and financial controller.
1-34 (30 min.) Pharmaceutical company, budgeting, ethics.
The idea of capitalizing some of the company’s R&D expenditures (item c) is a direct violation of the IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws, regulations, and technical standards.” GAAP requires research and development costs to be expensed as incurred. Even if Maddox believes his transaction is justifiable, it violates the profession’s technical standards and would be unethical.
The other “year-end” actions occur in many organizations and fall into the “gray” to “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following:
The roles of the CFO include:
Controllership – the CFO provides financial information for reports to managers and shareholders and oversees the overall operations of the accounting system.
Tax – the CFO plans all tax liabilities and receipts of the business including value added tax (VAT)
Treasury – the CFO oversees banking, short and long-term financing, investments and cash management of the business.
Risk management – the CFO manages the financial risk resulting from interest rate and exchange rate changes, and the management of the derivatives.
Investor relations – the CFO communicates with stakeholders of the organization including the shareholders, suppliers and investors.
Strategic planning – the CFO defines the financial strategy of the organization and allocates resources to implement such strategies.
The roles of the controller (also known as chief accounting officer) include:
Globally financial planning
Budget preparation
Managing working capital
Profitability reporting
Subsidiary and liaison accounting
Figure 1: Flowchart indicating the roles and relationship between CFO and financial controller.
1-34 (30 min.) Pharmaceutical company, budgeting, ethics.
- The overarching principles of the IMA Statement of Ethical Professional Practice are Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for Ethical Behavior…” require management accountants to
- Perform professional duties in accordance with relevant laws, regulations, and technical standards.
- Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
- Communicate information fairly and objectively.
- Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.
The idea of capitalizing some of the company’s R&D expenditures (item c) is a direct violation of the IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws, regulations, and technical standards.” GAAP requires research and development costs to be expensed as incurred. Even if Maddox believes his transaction is justifiable, it violates the profession’s technical standards and would be unethical.
The other “year-end” actions occur in many organizations and fall into the “gray” to “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following:
- Cut planned bonuses to the Amiven R&D team that would be paid in the third quarter, knowing that doing so may result in lower productivity and increased turnover of highly skilled staff. This solution is not a violation of ethical standards, but this action may not be in the best interest of the company in the long run. Reducing bonuses may help achieve the budget but losing highly skilled employees would harm the company’s ability to develop new products in the future and hurt long-run profits.
- Sell off rights to the drug, Centrix. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would, however, result in a onetime gain that could offset the budget shortfall. Of course, all future profits from Centrix would be lost. Again, this solution may solve the company’s short-term budget crisis, but could result in the loss of future profits for Pharmex in the long run. If this action does not create value for Pharmex, it would result in taking an uneconomic action simply to manage accounting earnings in the third quarter.
- While it is not uncommon for companies to sacrifice long-term profits for short-term gains, it may not be in the best interest of the company’s shareholders. In the case of Pharmex, the CFO is primarily concerned with “maximizing shareholder wealth” in the immediate future (third quarter only) but not in the long term. Because this executive’s incentive pay and even employment may be based on her ability to meet short-term targets, she may not be acting in the best interest of the shareholders in the long run.