Problem $14-11($Static$)$

Hatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $$300$ million. Hatfield is currently under investigation by the Securities and Exchange Commission $($SEC$)$ for accounting irregularities in its financial statements. A due$-$diligence team from the SEC has been sent to Hatfield$$s corporate headquarters for an audit. The team finds that:

Management has been involved in ongoing negotiations with the local labor union. Labor officials are seeking increased wages and pension benefits, which Hatfield$$s management states is not possible at this time due to decreased profitability. Labor officials have accused Hatfield$$s management of manipulating the company$$s financial statements to justify not granting any wage concessions.

Recently obtained equipment has been classified as operating leases, although, in the past, acquisitions of similar equipment were nearly always classified as capital leases. Capital leases for this type of equipment are the industry norm. The SEC wants Hatfield$$s management to provide justification for this apparent deviation from $$normal$$ accounting practices.

Inventory has been increasing in comparison to sales growth. Management credits improved operating efficiencies that have boosted overall production. The SEC wonders whether Hatfield may have manipulated its inventory accounts.

The SEC due$-$diligence team is not necessarily searching for evidence of fraud but of possible manipulation of accounting standards to mislead shareholders and other interested parties. Initial review of Hatfield$$s financial statements indicates that, at a minimum, certain practices have resulted in low$-$quality earnings.

Required:

The SEC due$-$diligence team is searching for the reason behind Hatfield$$s inventory buildup relative to its sales growth. One way to identify a deliberate manipulation of financial results by Hatfield is to search for:

multiple choice

a decline in inventory turnover.

receivables that are growing faster than sales.

a delay in the recognition of expenses.