Healthful Foods, Inc. a manufacturer of breakfast cereals and snack bars, has experienced several years of steady growth in sales, profits, and dividends while maintaining a relatively low level of debt. The board of directors has adopted a long-term strategy of maximizing the value of the shareholders' investment. To achieve this goal, the board established the following five-year financial objectives:
• Increase sales by 12% per year.
• Increase income before taxes by 15% per year.
• Increase dividends by 12% per year.
• Maintain long-term debt at a maximum 16% of assets.
For the past three years, the company has attained these financial objectives. At the beginning of last year, the president of Healthful Foods, Andrea Donis, added a fifth financial objective: maintaining cost of goods sold at a maximum of 70% of sales. The company attained this new goal last year.
Results for the current year have been disappointing. Increased emphasis on healthful eating has driven up the cost of raw ingredients significantly. Because of a prolonged recession, the company has been unable to pass on those cost increases to customers in the form of price increases.
John Winslow, the cost accountant at Healthful Foods, has just completed a review of the year's operating results, which suggests that the cost of goods sold objective will not be met this year. Because employee bonuses are tied to performance on all five objectives, Winslow is concerned about company morale. After additional scrutiny, he decides that if he overestimates the amount of ending work in process inventory and reclassifies the fruit and grain inspection costs as administrative rather than manufacturing overhead costs, cost of goods sold for the year will fall below the 70% maximum level. Winslow makes the adjustments and presents Donis with a set of financial statements that meets the company's five financial objectives.

a. Explain why the adjustments Winslow made are unethical, referring to the IMA's Statement of Ethical Professional Practice.
b. What additional costs, both monetary and nonmonetary, might Healthful Foods incur as a result of Winslow's actions?

  • CreatedFebruary 21, 2014
  • Files Included
Post your question