Chapter 11, Problem 7ATC

a.

To determine

Explain the manner by which the strategies provided for increasing the amount of the current year’s loss would affect the stockholder’s equity section of the balance sheet in the current year and also explain the other elements of the balance sheet that is been affected by the strategies.

b.

To determine

Explain the way the stockholder’s equity section will be affected during the subsequent years, when the strategy framed by the Person S is effectively implemented.

c.

To determine

Comment on the ethical implications of running the company for the sake of the management (maximization of bonuses) versus the maximization of return to stockholders.

d.

To determine

Formulate a bonus plan that will motivate managers to maximize the value of the firm instead of motivating them to manipulate the reporting process.

e.

To determine

Explain the manner by which Person’s strategy of overstating the amount of the reported loss in the current year will affect the company’s current P/E ratio.