VI.+Homework


 * VI. Module 1000 Homework **

**Exercise 1-5 Cornerstones of Cost Accounting pg. 15 ** Consider the following thoughts of a manager at the end of the company’s third quarter: If I can increase my reported profit by $2 million, the actual earnings per share will exceed analyst’s expectations & stock prices will increase. The stock options that I am holding will become more valuable. The extra income will also make me eligible to receive a significant bonus. With a son headed to college, it would be good if I could cash in some of these options to help pay his expenses. However, my vice president of finance indicates that such an increase is unlikely. The projected profit for the 4th quarter will just about meet expected earnings per share. There may be ways, though, that I can achieve the desired outcome. First, I can instruct all divisional managers that their preventative maintenance budgets are reduced by 25% for the 4th quarter. That should reduce maintenance expenses by approximately $1 million. Second, I can increase the estimated life of the existing equipment, producing a reduction of depreciation by another $500,000. Third, I can reduce the salary increases for those being promoted by 50%. And that should easily put us over the needed increase of $2 million. Required: Comment on the ethical content of the earnings management being considered by the manager. Is there an ethical dilemma? What is the right choice for the manager to make? Is there any way to redesign the accounting reporting system to discourage the type of behavior the manager is contemplating?

Reference: Hansen, D.R. & Mowen, M.M. (2011). //Cornerstones of Cost Accounting//. Mason, OH: South-Western Cengage Learning.