Consider the following thoughts of a manager at the end of the company’s third quarter:
If I can increase my reported profit by $2 million, the actual earnings per share will exceed analysts’ expectations, and stock prices will increase. The stock options that I am holding will become more valuable. The extra income will also make me eligible to receive a significant bonus. With a son headed to college, it would be good if I could cash in some of these options to help pay his expenses. However, my vice president of finance indicates that such an increase is unlikely. The projected profit for the fourth quarter will just about meet the expected earnings per share. There may be ways, though, that I can achieve the desired outcome. First, I can instruct all divisional managers that their preventive maintenance budgets are reduced by 25 percent for the fourth quarter. That should reduce maintenance expenses by approximately $1 million. Second, I can increase the estimated life of the existing equipment, producing a reduction of
Required:
Comment on the ethical content of the earnings management being considered by the manager. Is there an ethical dilemma? What is the right choice for the manager to make? Is there any way to redesign the accounting reporting system to discourage the type of behavior the manager is contemplating?
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Chapter 1 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- A. Assume that you have completed your plans and proformas for the next year of operations. The upcoming year looks promising. What would you most likely do from the following list? a. From your proformas project your company’s weighted average cost of capital and return on assets, and compare the two b. Take a vacation because you have been working so hard c. Purchase a new house for your personal use because the future is looking so good d. Make sure that your company’s weighted average cost of capital exceeds your company’s return on assets, if not, rework your plans and proformas B. Assume that all sales are on account. If the average accounts receivable balance was $1,000,000 and accounts receivable turnover was 12 for the last year of operations, what was sales revenue? a. $10,000,000 b. $15,000,000 c. $12,000,000 d. $6,000,000arrow_forwardYou have invested in a business that proudly reports that it is profitable. Your investment of $4000 has produced a profit of $201. The managers think that if you leave your $4500 levested with them, they should be able to generate $291 per year in profits for you in perpetuity. Evaluating other investment opportunites, you note that other long-term investments of similar risk offer an expected return of 7.9%. Should you remain invested in this fr ? The expected ratus of your envestment is__? (Round to one decimal)arrow_forwardSuppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial implications of the two alternatives. Let's assume that your alternatives are as follows: If you take the "get a job" route you expect to start off with a salary of $40,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 5 percent per year until you retire in 45 years. As a law student, you will be paying $25,000 per year tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $75,000 per year. Moreover, you expect your salary to grow by 7 percent per year until you retire 39 years later. Clearly, your total expected lifetime salary will be higher if you become a…arrow_forward
- You have recently completed your training contract and managed to save a small amount of money during the three years of your contract. You are thinking about investing the money and are considering investment opportunities which would maximize your return. A friend of yours has recently received a ‘hot tip’ from his uncle for HiFly Ltd, a share on the JSE, which is currently providing high returns. You are looking at investing 40% of your money in HiFly Ltd and the balance in Treasury Bills. The average rate of return on Treasury Bills next year will be 9%. You have been provided with the following relevant information: (Information attached in image below) ROUND ALL ANSWERS TO TWO DECIMAL PLACES REQUIRED: Calculate the expected return of HiFly Ltd. Answer% Calculate the expected return of the market. Answer% Calculate the standard deviation of HiFly Ltd. Answer% Calculate the standard deviation of the market. Answer% Calculate the covariance of returns between the market and HiFly…arrow_forwardplease help mearrow_forwardAssume that you are the financial manager for your company. What should be your number one priority goal to assure your company is successful in the next year? What skill do you think you need to possess in order to accomplish this goal?arrow_forward
- As a savvy entrepreneur, you decided to invest $8,000 in a start-up tech company in 2009. Since then, your investment has grown at a rate of 6.3% each year. Write a function to express the value of your investment, I, in the tech company as a function of t, the number of years since you made the investment. If the pattern continues, when will your investment exceed $18,000? (give the year and determine if it is early, mid, or late of that year) What is the monthly growth rate of your investment? (round answer to 1 decimal place)? What is the decade growth rate of your investment? (round answer to 1 decimal place)? Blank # 1 A/ Blank # 2 Blank # 3arrow_forwardYou are considering investing in a start up company. The founder asked you for $290,000 today and you expect to get $980,000 in 8 years. Given the riskiness of the investment opportunity, your cost of capital is 25%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.arrow_forwardYou are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP. The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments. Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against…arrow_forward
- You are considering investing in a start up company. The founder asked you for $200,000 today and you expect to get $1,000,000 in 9 years. Given the riskiness of the investment opportunity, your cost of capital is 20%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.arrow_forwardAaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Aaron expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows: In addition to these cash flows, Aaron expects to pay $20,100 for the equipment. He also expects to pay $3,500 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,800 salvage value and a four year useful life. Aaron desires to earn a rate of return of 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)arrow_forwardSuppose you are the financial manager of a large national food processing firm. In your travels, you run across a small regional food processor that you believe will provide your firm with annual returns of over 30%. Returns on your firm’s typical investments are around 20%. Should you propose that your firm acquire this regional food processor? What factors need to be considered in this decision?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning