In his meeting with financial analysts at the beginning of the year, the company's Chief Executive Officer
Question:
In his meeting with financial analysts at the beginning of the year, the company's Chief Executive Officer (CEO) predicted that the company's profits would increase by 25% this year. Unfortunately, sales were less than expected for the year. Two weeks before the end of the year, the CEO concluded that it would ultimately be impossible to report an increase in profit unless serious action was taken. Accordingly, the CEO instructed to defer expenses to the following year whenever possible, including canceling or postponing orders with suppliers, postponing planned maintenance and training, and reducing year-end advertising and travel. In addition, the CEO ordered the company's financial controller to carefully examine all costs currently classified as period costs and reclassify as many as possible as product costs.
Necessary:
(i) Based on the above situation, explain the importance of accounting information to the CEO. (
ii) Do you believe the CEO's actions are unethical? Justify your answer.
QUESTION 2 (20 POINTS)
SURVEY Professor John Innes says Falconer Mitchell and Donald Sinclair have conducted two surveys designed to examine ABC adoption trends in the UK over a five-year period. The professors' initial survey results were based on responses from 352 of the UK's largest companies, while follow-up survey results five years later were based on responses from 177 of the UK's largest companies. Initial survey results show that 21% of respondents currently use ABC, 29.6% are considering adopting ABC, 13.3% have rejected ABC after considering implementing it, and 36.1% are using ABC He showed that he wasn't thinking about . A follow-up survey five years later found that 17.5% of respondents were currently using ABC, 20.3% were considering adopting ABC, It showed that 15.3% rejected ABC after considering the application and 46.9% did not consider ABC. The professors summarized their findings by saying, "These results are indicative of a lack of growth in the popularity of ABC and are consistent with both the stabilization of interest in it and its adoption over this five-year period." Source: John Innes, Falconer Mitchell and Donald Sinclair, `Activity-Based Costing in the UK's Largest Companies: A Comparison of 1994 and 1999 Survey Results,' Management Accounting Research, September 2000. pp. 349-362. "It is indicative of a lack of growth in the popularity of ABC and is consistent with both stabilizing interest in it and its adoption over this five-year period." Source: John Innes, Falconer Mitchell and Donald Sinclair, `Activity-Based Costing in the UK's Largest Companies: Comparison of 1994 and 1999 Survey Results,” Management Accounting Research, September 2000. p. 349-362. "It is indicative of a lack of growth in the popularity of ABC and is consistent with both stabilizing interest in it and its adoption over this five-year period." Source: John Innes, Falconer Mitchell and Donald Sinclair, `Activity-Based Costing in the UK's Largest Companies: Comparison of 1994 and 1999 Survey Results,” Management Accounting Research, September 2000. p. 349-362.
Based on the above survey findings, discuss the issues, challenges and solutions regarding the implementation of Activity Based Costing by companies.
QUESTION 3 (10 POINTS)
Look at Case 26-1 below and answer the corresponding question in the case study
Import Distributors, Inc. (IDI) imported the devices and distributed them to retail device stores in the Rocky Mountain states. IDI carried three broad lines of commercial products: audio equipment (tuners, tape recorders, CD players, etc.), television equipment (including video cassette recorders), and kitchen appliances (refrigerators, freezers, and stoves that were more compact than U.S. models). Each line accounted for approximately one-third of total IDI sales revenues. Although each line is referred to as a "department" by IDI managers, the company did not prepare departmental income statements until 1994.
In late 1993, departmental accounts were created in anticipation of quarterly income statements being prepared by the department starting in 1994. In early April 1994, the first such statements were distributed to the management group. Although IDI generated net income of 4.3 percent of sales in the first quarter of 1994, the television department showed too small a gross profit to cover the department's operating expenses (see Exhibit 1).
The television department's poor performance led the company's accountant to suggest that perhaps the department should be closed. “That's exactly why I suggested we prepare department statements to see if each department is bearing its fair share of the burden,” the accountant said. This proposal sparked much debate among the management group, particularly regarding two issues: First, was the first quarter of the year sufficient in terms of longer-term results to consider discontinuing the television department? Second, would discontinuing television equipment cause a decline in sales in the other two departments? However, one executive said "even if the quarter was a normal one and other sales did not suffer, I'm still not convinced it would be better for us to drop the television series."
Question
What actions should be taken regarding the television department?
SERGİ 1 | TELEVISION DEPARTMENT | ||||||
Income statement | |||||||
For the First 3 Months of 1994 | |||||||
Percentage | |||||||
net sales revenues | 1.612.403 $ | 100.0 | |||||
selling costs | 1.422.473 | 88.2 | |||||
gross profit margin | 189.930 | 11.8 | |||||
Operating expenses: | |||||||
Personnel expenses (Note 1) | 10.140 | ||||||
Department manager's office | 12.393 | ||||||
Kira (Not 2) | 50.107 | ||||||
Inventory, taxes and insurance | 37.214 | ||||||
Utilities (Note 3) | 3.006 | ||||||
Delivery costs (Note 4) | 32.248 | ||||||
Sales commissions (Note 5) | 80.621 | ||||||
Administrative costs (Note 6) | 40.310 | ||||||
Inventory finance expense (Note 7) | 23.708 | ||||||
Total operating expenses | 289.307 | 18.0 | |||||
Income taxes (credit) | (34.957) | (2.2) | |||||
Net income (loss) | (64.920) | (4.0) | |||||
1) These were warehouse personnel. Although the goods in the warehouse were organized by departments, these personnel worked for all three departments every day. | |||||||
2) Allcoated into sections based on square meters used. IDI had a 5-year non-cancellable lease for the facilities | |||||||
3) It is allocated to sections based on the square meters used. | |||||||
4) Allocated based on sales dollars. A delivery from IDI to a retail store typically included goods from all three departments. | |||||||
5) Salespeople were paid directly on a commission basis; sold all three lines each | |||||||
6) All coated based on sales dollars. | |||||||
7) An accounting record that is evaluated on the average stock, not limited only to the stock financing cost, in order to motivate department managers not to carry excess stock. This fee tends to be approximately 3x the company's actual out-of-pocket interest costs. |
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay