Ethical Dilemma Product cost versus selling and administrative expense Emma Emerson is a proud woman with a problem. Her daughter has been accepted into a prestigious law school. While Ms. Emerson beams with pride, she is worried sick about how to pay for the school; she is a single parent who has worked hard to support herself and her three children. She had to go heavily into debt to finance her own education. Even though she now has a good job, family needs have continued to outpace her income and her debt burden is staggering. She knows she will be unable to borrow the money needed for her daughter’s law school. Ms. Emerson is the chief financial officer (CFO) of a small manufacturing company. She has just accepted a new job offer. Indeed, she has not yet told her employer that she will be leaving in a month. She is concerned that her year-end incentive bonus may be affected if her boss learns of her plans to leave. She plans to inform the company immediately after receiving the bonus. She knows her behavior is less than honorable, but she believes that she has been underpaid for a long time. Her boss, a relative of the company’s owner, makes twice what she makes and does half the work. Why should she care about leaving with a little extra cash? Indeed, she is considering an opportunity to boost the bonus. Ms. Emerson’s bonus is based on a percentage of net income. Her company recently introduced a new product line that required substantial production start-up costs. Ms. Emerson is fully aware that GAAP requires these costs to be expensed in the current accounting period, but no one else in the company has the technical expertise to know exactly how the costs should be treated. She is considering misclassifying the start-up costs as product costs. If the costs are misclassified, net income will be significantly higher, resulting in a nice boost in her incentive bonus. By the time the auditors discover the misclassification, Ms. Emerson will have moved on to her new job. If the matter is brought to the attention of her new employer, she will simply plead ignorance. Considering her daughter’s needs, Ms. Emerson decides to classify the start-up costs as product costs. Required a. Based on this information, indicate whether Ms. Emerson believes the number of units of product sold will be equal to, less than, or greater than the number of units made. Write a brief paragraph explaining the logic that supports your answer. b. Explain how the misclassification could mislead an investor or creditor regarding the company’s financial condition. c. Explain how the misclassification could affect income taxes. d. Review the Statement of Ethical Professional Practice shown in Exhibit 10.19 and identify at least two ethical principles that Ms. Emerson’s misclassification of the start-up costs violated.

Cost Information and Ethical Behavior, Service Organization Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a 15,000 personal loan to pay offjust when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, Im at a critical point in my business venture. If I can win the bid for the states advertising dollars, Ill be set. Winning the bid will bring 600,000 to 700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another 200,000 to 300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. Its a competitive business, though. As new as you are, I doubt that youll have much chance of winning. Jean: Youre forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governors campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, youll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that Im not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and Ill make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of 15,000. On top of that, Ill increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day oneand what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firms bid. Required: 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroys company would say about this situation? 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?

Natural Form VS. Functional Form Mercedita’s business is had just opened last year. She buys products online and also sells them online. Her business had been earning a profit since then. To obtain how much she earned, Mercedita just deducts all her costs and expenses from her total sales. She wants to know if the method she is using will benefit the business the most. 1. What method is she applying for the business? 2. What would you recommend to Mercedita. Support your answer. (Three sentences)

Ms. Faye Santos is an accounting major at a Midwestern state university located approximately 60 miles from a major city. Ms. Faye Santos is an accounting major at a Midwestern state university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan areas and visit their homes regularly on the weekends. Faye, an entrepreneur at heart, realizes that few good commuting alternatives are available for students doing weekend travel. She believes that a weekend commuting service could be organized and run profitably from several suburban and downtown shopping mall locations. Faye has gathered the following investment information. Five used vans would cost a total of $75,000 to purchase and would have a three-year useful life with negligible salvage value. Faye plans to use straight-line depreciation. Ten drivers would have to be employed at a total payroll expense of $48,000. 3. Other annual out-of-pocket expenses…

Scenario Much like the decision to start a business, the decision to attend college is fraught with risk; however, the risk of entering the job market with only a high school diploma is just as great. As the U.S. transformed from a manufacturing-based economy to an economy based on knowledge, high school graduates are often unable to obtain the number of high-paying jobs that were once available. College graduates earn more-some suggest as a much as 60% more over a lifetime than those without a college degree, and have a lower divorce rate, lower blood pressure and stress levels, and higher rates of job stability and satisfaction. However, a college education may not be the right choice for some. There may be a glut of college-educated workers in our workforce, and many careers, including those in cosmetology, do not require a college degree. The U.S. Department of Labor projects jobs for hairdressers, hairstylists, cosmetologists, and skin care specialists to grow 9-17% through the…

All else being equal, if an average family's income were to decrease because of the elimination of a marginal source of income like weekly overtime work, what types of goods might be more in demand? Choose any that apply A. Gasoline B. Cheaper varieties of food C. Off-brand jeans D. Fine dining at expensive restaurants

Frank Pepe’s Restaurant and Pie Shop needs help defining the costs for his business. Frank also wants to know which costs are relevant or irrelevant to his decision making. Identify each cost as relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity). Cost Relevant or irrelevant sunk, fixed, variable, or opportunity Rent baker wages franks culinary school tuition Berries for pies paiting dining area last year franks decision not to attend graduate school

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Chapter17 Ethical Case: Hart Nance and Jason Symington operate gift boutiques in shopping malls. The partners split profits and losses equally, and each takes an annual withdrawal of $80,000. To even out the workload, Nance travels around the country inspecting their properties. Symington manages the business and serves as the accountant. From time to time, they each may use small amounts of store merchandise for personal use. In preparing for his daughter's wedding, Symington took inventory that cost $10,000. He recorded the transaction as follows: Accounts Debit Credit Cost of Goods Sold $10,000 Merchandise Inventory $10,000 What journal entry should Symington have used to record this transaction? Is Symington's transaction ethical? If so, please fully explain why it is ethical. If not, please fully explain why it is not ethical.

Beverly Moore is struggling to pass her introductory accounting course. Beverly is intelligent but she likes to party. Studying is a low priority for Beverly. When one of her friends tells her that she is going to have trouble in business if she doesn’t learn accounting, Beverly responds that she doesn’t plan to go into business. She says that she is arts-oriented and plans someday to be a director of a museum. She is in the school of business to develop her social skills, not her quantitative skills. Beverly says she won’t have to worry about accounting because museums are not intended to make a profit. Please answer the following questions: -explain whether you agree or disagree with Beverly's position regarding accounting and not-for-profit organizations. -Distinguish between financial accounting and managerial accounting -Identify some of the stakeholders of not-for-profit institutions that would expect to receive financial accounting reports. -Identify some of the…

Aside from discrimination, other possible explanations for why women on average earn less than men with similar or lower levels of education include which of the following? Women tend to opt for more part-time, as opposed to full-time work. Women tend to pay more taxes on average than men. Women tend to take more and longer breaks during their careers than do men. Women tend to enter lower-paid professions in larger numbers than men. Women tend to stay in the same job for longer periods of time than men.

i-Case One Running and Growing a Business Sherri has always loved to fix healthy snacks for family and friends and about a year ago she started to sell boxes of them at the local farmer’s market. Last week she heard from a local grocery chain that also wants to stock them. When Sherri was treating her snacks as a hobby, she never paid attention to the costs. Now, she needs to get a better understanding of the costs and cost behavior patterns. At this point she plans to rent a small space for the snack operation and to store inventory. She also has arranged for some part time help to support the snack making operation. These part-time workers will be paid a flat amount per box of snacks and will only be called into work if the volume of business makes it necessary. She also plans to hire someone to help stimulate additional sales. This salesperson’s compensation will include a small salary and a commission of a $1.00 for each box of snacks sold. For question 1-3 determine the most…

Consider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well. Donna: I understand the problem, but I dont see what can be done at this point. This is the last week of the fiscal year, and it looks like well report income just slightly above breakeven. Gary: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 200 partially finished machines in process, about 20% complete. That compares with the 1,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 1,040 equivalent units, giving us a manufacturing cost of 1,500 per unit. That per-unit cost gives us cost of goods sold equal to 1.5 million and ending work in process worth 60,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80% complete, this will increase our equivalent units to 1,160. This, in turn, will decrease our unit cost to about 1,345 and cost of goods sold to 1.345 million. The value of our work in process will increase to 215,200. With those financial stats, the loan would be a cinch. Donna: Gary, I dont know. What youre suggesting is risky. It wouldnt take much auditing skill to catch this one. Gary: You dont have to worry about that. The auditors wont be here for at least 6 to 8 more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext years overhead. Donna, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we dont do this, we could lose our jobs. Required: 1. Should Donna agree to Garys proposal? Why or why not? To assist in deciding, review the corporate code of ethics standards described in Chapter 1. Do any apply? 2. Assume that Donna refuses to cooperate and that Gary accepts this decision and drops the matter. Does Donna have any obligation to report the divisional managers behavior to a superior? Explain. 3. Assume that Donna refuses to cooperate; however, Gary insists that the changes be made. Now what should she do? What would you do? 4. Suppose that Donna is 63 and that the prospects for employment elsewhere are bleak. Assume again that Gary insists that the changes be made. Donna also knows that his supervisor, the owner of the company, is his father-in-law. Under these circumstances, would your recommendations for Donna differ?

Solution Summary: The author explains the logic behind Person E's beliefs that the product sold will be equal to, less than, or greater than the number of units sold.

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