You own 20 percent of Peribonka Ltd., a manufacturing company. You aren't involved in the day-to-day management of the company and you rely on the financial statements for information. You have been examining the 2016 financial statements and note that net income for the year was $215,000 and cash from operations $300,000. You are quite satisfied with these performance measures, which are significantly better than last year's, but you do have some concerns about decisions management has made and their impact on these numbers. You call a friend who is an executive at the company and he provides you with some additional information. He explains the following:
• The production manager decided to delay the major maintenance program that is usually done in December to January to accommodate the unusually tight produc tion schedule and to accommodate vacations during the holiday season. The cost of the maintenance program is about $125,000.
• There was a delay in processing a batch of cheques to suppliers that was supposed to be mailed on December 23 but didn't get prepared and mailed until January 3. The total of the cheques was $210,090.
• Peribonka increased its estimate of the useful lives of certain assets, which decreased the depreciation expense for the year by $30,000.

a. What would Peribonka's net income and cash from operations have been had the maintenance been done at the usual time, the payables paid on time, and the estimate of the useful lives of the assets not been changed?
b. What are some possible explanations for the changes and treatments described above? What are some possible reasons for management making these choices?

  • CreatedFebruary 26, 2015
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