Instructions Read the following scenario and address the questions below : Quest
ID: 2410601 • Letter: I
Question
Instructions Read the following scenario and address the questions below :
Questions:
1) Which Financial Statements are affected, and when?
2) How does this request benefit the manager? Are the manager’s actions ethical?
3) Are they legal? Explain your answer.
4) How could company policy have influenced the manager’s behavior?
Please answer all of the questions, if you can not answer all of the questions do not reply.
Cola Bonanza Corporation Record Keeping Practices The management of the well-known multinational corporation, Cola Bonanza Corporation, is infamous for "managing by the numbers". The CEO and the Board of Directors set the target profits at the beginning of the year for each of the company's divisions. As long as the targets are met, the CEO generally tends to ignore how division managers achieve them, and in fact, rewards division managers with a year-end bonus for meeting the targets. Late in the fiscal year, one division manager realized that making that year's profit target was unlikely to happen given the division's current expenses. So, the manager asked the accounting department to change the way it records their supplies expense at the end of the year. The manager asked that the cost of the supplies be added to the inventory account.Explanation / Answer
Answer 1
The manager’s decision will change Income statement as well as Balance sheet items. First of all Income of the company will increase due to added value in closing stock. Secondly Closing stock will be overstated in balance sheet and value of supplies will be understated.
Answer 2
The manager will achieve his target profit if he do this and will get his bonus as well. This is not ethical. Supplies are not goods held for sale so they should not be treated as inventory. They are a part of current assets.
Answer 3
The Act of the manager is not legal. As already stated supplies are not goods held for sale so they should not be treated as inventory rather be held only as current assets. The inflated value in closing stock will only increase profit and tax burden on the company. Manager is not authorized to make changes in the policies of accounting. Accounting policies are suppose to be followed consistently.
Answer 4
Manager is aware that CEO does not take care of how targets are achieved and just bothers about the final resuly. Manager is in a position where there is lack of internal control. Manager may not be able to pull this act if CEO of the company made some arrangements for the audit of divisions.