
Concept explainers
Evaluating an Ethical Dilemma: Earnings, Inventory Purchases, and Management Bonuses
Micro Warehouse was a computer software and hardware online and catalog sales company.* A 19% Wall Street Journal article disclosed the following:
MICRO WAREHOUSE IS REORGANIZING TOP MANAGEMENT
Micro Warehouse Inc. announced a “significant reorganization” of its management, including the resignation of three senior executives. The mow comes just a few weeks after the Norwalk. Conn., computer catalogue sales company said it overstated earnings by $28 million since 1992 as a result of accounting irregularities. That previous disclosure prompted a flurry of shareholder lawsuits against the company. In addition, Micro Warehouse said it is cooperating with an “informal inquiry" by the Securities and Exchange Commission.
Source: Stephan E. Frank. The Wall Street Journal, November 21. 1996. p. B2. Copyright © 1996 by Dow Jones & Co. Used with permission.
Its Form 10-Q quarterly report filed with the Securities and Exchange Commission two days before indicated that inaccuracies involving understatement of purchases and accounts payable in current and prior
*Micro Warehouse declared bankruptcy in 2003.
periods amounted to $47.3 million. It also indicated that, as a result. $2.2 million of executive bonuses for 1995 would be rescinded. Micro Warehouse's total tax rate is approximately 40.4 percent. Both cost of goods sold and executive bonuses are fully deductible for tax purposes.
Required:
As a new staff member at Micro Warehouse’s auditing firm, you are assigned to write a memo outlining the effects of the understatement of purchases and the rescinding of the bonuses. In your report, be sure to include the following:
- 1. The total effect on pretax and after-tax earnings of the understatement of purchases.
- 2. The total effect on pretax and after-tax earnings of the rescinding of the bonuses.
- 3. An estimate of the percentage of after-tax earnings management is receiving in bonuses.
- 4. A discussion of why Micro Warehouse's board of directors may have decided to tie managers’ compensation to reported earnings and the possible relation between this type of bonus scheme and the accounting errors.

Want to see the full answer?
Check out a sample textbook solution
Chapter 7 Solutions
Financial Accounting
- Honda Company had beginning raw materials inventory of $32,000. During the period, the company purchased $127,000 of raw materials on account. If the ending balance in raw materials was $21,500, the amount of raw materials transferred to work in process inventory is?arrow_forwardWhat is the static budget variance of oprating incomearrow_forwardGeneral accountingarrow_forward
- Highland Mountain Cabins records weekend rental fees. Weekly charges: luxury cabins 9 at $120 each, standard cabins 14 at $85 each. Specify the total rental revenue. Need answerarrow_forwardHighland Mountain Cabins records weekend rental fees. Weekly charges: luxury cabins 9 at $120 each, standard cabins 14 at $85 each. Specify the total rental revenue.arrow_forwardCan you help me solve this financial accounting problem using the correct accounting process?arrow_forward
- On January 1, Damon Manufacturing's Work-in-Process Inventory account had a balance of $34,800. During the year, $78,200 of direct materials was placed into production. Manufacturing wages incurred amounted to $96,400, of which $71,500 were for direct labor. Manufacturing overhead is allocated on the basis of 140% of direct labor cost. Actual manufacturing overhead was $108,300. Jobs costing $268,500 were completed during the year. What is the December 31 balance of Work-in-Process Inventory?arrow_forwardI need help with this general accounting question using the proper accounting approach.arrow_forwardI need guidance on solving this financial accounting problem with appropriate financial standards.arrow_forward
- Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningAuditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning





