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Reed Kohler is in his final year of employment as controller for Quality Sales Corporation: he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm's net income before bonus and income taxes - the larger the net income, the larger the bonus.
Due to a slowdown in the economy due to Coronavirus, the company has encountered difficulty in managing its
Explain why Kohler may be viewed as holding a position that favors his personal interests. What can Kohler do to increase his credibility when the possible change to LIFO is discussed with the firm's top management next week? (hint what are the disadvantages of using LIFO - Do a google search to help you go beyond the textbook.)
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- Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rates on those loans are tied to market interest rates and are adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to interest rate movements. The company has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Carson Company has assets valued at approximately $50 million and generates sales of nearly $100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because it expects the economy to be strong in the future, Carson plans to grow by expanding its business and…aren Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy considering a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital can also add value to a company by improving its EVA (Economic Value Added). In her corporate finance course Johnson learned that EVA is calculated by taking net operating profit after taxes (NOPAT) and then subtracting…Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $5,300 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 5,300 $ 4,700 Good .50 6,400 7,000 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the…
- Terry House, the controller for MicroTech Software Company, is responsible for preparing the company’s financial statements. He learns that sales for the first quarter of the year have dropped so dramatically that the company is in danger of bankruptcy. As a result, he applies for an accounting position with another software company that competes with MicroTech. During his job interview, Terry is asked why he wants to leave MicroTech. He replies truthfully, “The company’s sales are down another 10% this quarter. I fear they will go out of business.” At that time, MicroTech had not released its sales results to the public. Discuss the ethics of this situation.Rexcam is a partnership owned by Wilson, Watts, and Franklin that manufactures special machine tools used primarily in injection molding applications. The partnership had operated very profitably for the first five years of existence. However, in the last two years, 2013 and 2014, the company has been challenged by foreign competition and pricing pressures. During this time, Franklin, acting as the chief financial officer, began to have difficulty dealing with the financial pressures at work and issues in his personal life. Franklin had a fatal heart attack in early January of 2015, and the partnership agreement required the partnership to pay a deceased partner’s estate: (a) five times the deceased partner’s average annual share of profit based on the three years prior to death plus (b) 50% of their capital balance as of the year-end prior to date of death. The amount due to the deceased partner’s estate was to be determined by an outside independent accountant.Assuming you have been…Recently, the owner of a Trader Joe's franchise decided to change how she compensated her top manager. Last year, she paid him a fixed salary of $65,000, and her store made $120,000 in profits (not counting payment to her top manager). She suspected the store could do much better and feared the fixed salary was causing her top manager to shirk on the job. Therefore, this year she decided to offer him a fixed salary of $30,000 plus 15 percent of the store's profits. Since the change, the store is performing much better, and she forecasts profits this year to be $280,000 (again, not counting the payment to her top manager). Assuming the change in compensation is the reason for the increased profits, and that the forecast is accurate, (a) Which compensation method (the old one or the new one) will the manager prefer? Please explain why. (b) Which compensation method (the old one or the new one) would the owner of the franchise prefer? Please explain why. (c) If there was another…
- Waterway Industries is a growing company whose ability to raise capital has not been growing as quickly as its expanding assets and sales. Waterway Industries's local banker has indicated that the company cannot increase its borrowing for the foreseeable future. Waterway Industries's suppliers are demanding payment for goods acquired within 30 days of the invoice date, but Waterway Industries's customers are slow in paying for their purchases (60-90 days). As a result, Waterway Industries has a cash flow problem. Waterway Industries needs $147,100 to cover next Friday's payroll. Its balance of outstanding accounts receivable totals $767,100. To alleviate this cash crunch, the company sells $164,200 of its receivables. Record the entry that Waterway Industries would make. (Assume a 2% service charge.) (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit CreditLast Tuesday, Fuzzy Button Clothing Company lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Delta is 14.6%, but he can’t recall how much Fuzzy Button originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Delta. They are: Year Cash Flow Year 1 $1,800,000 Year 2 $3,375,000 Year 3 $3,375,000 Year 4 $3,375,000 The CFO has asked you to compute Project Delta’s initial investment using the information currently available to you. He has offered the following suggestions and observations: • A project’s IRR represents the return the project would generate when its NPV is zero or the discounted value of its cash inflows equals the discounted value of its cash outflows—when the cash flows are discounted using the…An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now. In ten years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a ten-year life and expected salvage value of $175,000. The tax rate is 35%, the CCA rate, 25% for both excavators, and the required rate of return for the company is 14%. What is the NPV of the new excavator?
- II. Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff including him. Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.” Instructions…Members of the board of directors of Safety Place have received the following operating income data for the year ended May 31, 2018: (Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $80,000 and decrease fixed selling and administrative expenses by $10,000. Read the requirements. Requirement 1. Prepare a differential analysis to show whether Safety Place should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.) in operating incomeHorizon Corporation manufactues personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition and price slashing in the industry, 2020's income statement reported a loss of $20 million. Just before the end of 2021 fiscal year, a memo from the company's chief financial officer (CFO) to Jim Fielding, the company controller, included the following comments: "If we dont do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. The resulting loss for 2021 will cause a violation of our debt convenants and force the company into bankruptcy. I suggest that you ship half of out inventory to J.B. Sales, Inc., in Oklahoma City. I know the company's presdient, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost our loss to a profit. Then J.B. Sales will simply return…
