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South-Western Federal Taxation 2013 Comprehensive 36th Edition Solutions Manual and Test Bank

South-Western Federal Taxation 2013: Comprehensive 36th Edition Solutions Manual and Test Bank

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Contents:
* Test Bank ( Chapter 1 to 28 )
* Solutions Manual ( Chapter 1 to 28 )
* Answers to the research problems
* Solutions to Appendix E

Contents of Appendix E
Problem 1 – Karl F. and Jeanne S. Wheat – Individual Income Tax Return
Problem 2 – Robert (Bob) S. and Sally D. Grove – Individual Income Tax Return
Problem 3 – Pet Kingdom – Form 1120 Corporate Tax Return
Problem 4 – By the Numbers – Form 1120 Corporate Tax Return
Problem 5 – Rock the Ages – Form 1065 tax return
Problem 6 – Chocolat, Inc – Form 1120S
Problem 7 – Daniel and Lisa Ward – Form 709 Tax Returns
Problem 8 – Pam Butler – Form 706 Tax Return
Problem 9 – Green – Form 1041 Tax Return

Solutions Manual Test Bank Introduction to Managerial Accounting by Peter Brewer

Introduction to Managerial Accounting 6e by Peter Brewer Solutions Manual Test Bank

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Managerial Accounting, by Garrison 14th Edition Solution Manual Test Bank

Managerial Accounting, by Garrison 14th Edition Solution Manual Test Bank

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Intermediate Accounting Kieso Weygandt Warfield 13th edition Test Bank

Intermediate Accounting Kieso Weygandt Warfield 13th edition Solutions Manual Test Bank

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Intermediate Accounting 6th edition Spiceland solutions manual and testbank

Intermediate Accounting 6th edition Spiceland solutions manual and testbank


Intermediate Accounting 6th edition Spiceland solutions manual and testbank

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Sample Chapter:

Chapter 1   Environment and Theoretical Structure of Financial Accounting

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 1-1
Financial accounting is concerned with providing relevant financial information about various kinds of organizations to different types of external users.  The primary focus of financial accounting is on the financial information provided by profit-oriented companies to their present and potential investors and creditors.
Question 1-2
Resources are efficiently allocated if they are given to enterprises that will use them to provide goods and services desired by society and not to enterprises that will waste them.  The capital markets are the mechanism that fosters this efficient allocation of resources.
Question 1-3
Two extremely important variables that must be considered in any investment decision are the expected rate of return and the uncertainty or risk of that expected return.
Question 1-4
In the long run, a company will be able to provide investors and creditors with a rate of return only if it can generate a profit.  That is, it must be able to use the resources provided to it to generate cash receipts from selling a product or service that exceeds the cash disbursements necessary to provide that product or service.
Question 1-5
The primary objective of financial accounting is to provide investors and creditors with information that will help them make investment and credit decisions.
Question 1-6
Net operating cash flows are the difference between cash receipts and cash disbursements during a period of time from transactions related to providing goods and services to customers.  Net operating cash flows may not be a good indicator of future cash flows because, by ignoring uncompleted transactions, they may not match the accomplishments and sacrifices of the period.
Answers to Questions (continued)

Question 1-7
GAAP (generally accepted accounting principles) are a dynamic set of both broad and specific guidelines that a company should follow in measuring and reporting the information in their financial statements and related notes.  It is important that all companies follow GAAP so that investors can compare financial information across companies to make their resource allocation decisions.
Question 1-8
In 1934, Congress created the SEC and gave it the job of setting accounting and reporting standards for companies whose securities are publicly traded.  The SEC has retained the power, but has delegated the task to private sector bodies.  The current private sector body responsible for setting accounting standards is the FASB.
Question 1-9
Auditors are independent, professional accountants who examine financial statements to express an opinion.  The opinion reflects the auditors’ assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.  The auditor adds credibility to the financial statements, which increases the confidence of capital market participants relying on that information.
Question 1-10
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The most dramatic change to federal securities laws since the 1930s, the Act radically redesigns federal regulation of public company corporate governance and reporting obligations. It also significantly tightens accountability standards for directors and officers, auditors, securities analysts and legal counsel. Student opinions as to the relative importance of the key provisions of the act will vary. Key provisions in the order of presentation in the text are:
Creation of an Oversight Board
Corporate executive accountability
Non-audit services
Retention of work papers
Auditor rotation
Conflicts of interest
Hiring of auditor
Internal control
Answers to Questions (continued)

Question 1-11
New accounting standards, or changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups by causing redistribution of wealth.  There also is the possibility that standards could harm the economy as a whole by causing companies to change their behavior.
Question 1-12
The FASB undertakes a series of elaborate information gathering steps before issuing an accounting standards update to determine consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences.
Question 1-13
The purpose of the conceptual framework is to guide the Board in developing accounting standards by providing an underlying foundation and basic reasoning on which to consider merits of alternatives.  The framework does not prescribe GAAP.
Question 1-14
Relevance and faithful representation are the primary qualitative characteristics that make information decision-useful.  Relevant information will possess predictive and/or confirmatory value.  Faithful representation is the extent to which there is agreement between a measure or description and the phenomenon it purports to represent. 
Question 1-15
The components of relevant information are predictive and/or confirmatory value.  The components of faithful representation are completeness, neutrality, and free from material error.
Question 1-16
The benefit from providing accounting information is increased decision usefulness.  If the information is relevant and possesses faithful representation, it will improve the decisions made by investors and creditors.  However, there are costs to providing information that include costs to gather, process, and disseminate that information.  There also are costs to users in interpreting the information as well as possible adverse economic consequences that could result from disclosing information.  Information should not be provided unless the benefits exceed the costs.

Answers to Questions (continued)

Question 1-17
Information is material if it is deemed to have an effect on a decision made by a user.  The threshold for materiality will depend principally on the relative dollar amount of the transaction being considered.  One consequence of materiality is that GAAP need not be followed in measuring and reporting a transaction if that transaction is not material.  The threshold for materiality has been left to subjective judgment.
Question 1-18
1. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
2. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions.
3. Equity is the residual interest in the assets of any entity that remains after deducting its liabilities.
4. Investments by owners are increases in equity resulting from transfers of resources, usually cash, to a company in exchange for ownership interest.
5. Distributions to owners are decreases in equity resulting from transfers to owners. 
6. Revenues are inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
7. Expenses are outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
8. Gains are defined as increases in equity from peripheral or incidental transactions of an entity.
9. Losses represent decreases in equity arising from peripheral or incidental transactions of an entity.
10. Comprehensive income is defined as the change in equity of an entity during a period from nonowner transactions.
Question 1-19
The four basic assumptions underlying GAAP are (1) the economic entity assumption, (2) the going concern assumption, (3) the periodicity assumption, and (4) the monetary unit assumption.
Question 1-20
The going concern assumption means that, in the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.  This assumption is important to many broad and specific accounting principles such as the historical cost principle.
Answers to Questions (continued)
Question 1-21
The periodicity assumption relates to needs of external users to receive timely financial information.  This assumption requires that the economic life of a company be divided into artificial periods for financial reporting. Companies usually report to external users at least once a year.

Question 1-22
The four key broad accounting principles that guide accounting practice are (1) the historical cost or original transaction value principle, (2) the realization or revenue recognition principle, (3) the matching principle, and (4) the full disclosure principle.

Question 1-23
Two important reasons to base valuation on historical cost are (1) historical cost provides important cash flow information since it represents the cash or cash equivalent paid for an asset or received in exchange for the assumption of a liability, and (2) historical cost valuation is the result of an exchange transaction between two independent parties and the agreed upon exchange value is, therefore, objective and possesses a high degree of verifiability.

Question 1-24
The realization principle requires that two criteria be satisfied before revenue can be recognized:
1. The earnings process is judged to be complete or virtually complete, and,
2. There is reasonable certainty as to the collectibility of the asset to be received (usually cash).

Answers to Questions (concluded)
Question 1-25
The four different approaches to implementing the matching principle are:
1. Recognizing an expense based on an exact cause-and-effect relationship between a revenue and expense event.  Cost of goods sold is an example of an expense recognized by this approach.
2. Recognizing an expense by identifying the expense with the revenues recognized in a specific time period.  Office salaries is an example of an expense recognized by this approach.
3. Recognizing an expense by a systematic and rational allocation to specific time periods.  Depreciation is an example of an expense recognized by this approach.
4. Recognizing expenses in the period incurred, without regard to related revenues.  Advertising is an example of an expense recognized by this approach.

Question 1-26
In addition to the financial statement elements arrayed in the basic financial statements, information is disclosed by means of parenthetical or modifying comments, notes, and supplemental financial statements.
Question 1-27
GAAP prioritizes the inputs companies should use when determining fair value.  The highest and most desirable inputs, Level 1, are quoted market prices in active markets for identical assets or liabilities.  Level 2 inputs are other than quoted prices that are observable including quoted prices for similar assets or liabilities in active or inactive markets and inputs that are derived principally from observable related market data.  Level 3 inputs, the least desirable, are inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 
BRIEF EXERCISES

Brief Exercise 1-1
Revenues ($340,000 + 60,000) $400,000
Expenses:
   Rent ($40,000  2) (20,000)
   Salaries (120,000)
   Utilities ($50,000 + 2,000)  (52,000)
      Net income $208,000

Brief Exercise 1-2
(1) Liabilities
(2) Assets
(3) Revenues
(4) Losses
Brief Exercise 1-3
1. The periodicity assumption
2. The economic entity assumption
3. The realization (revenue recognition) principle
4. The matching principle
Brief Exercise 1-4
1. The matching principle
2. The historical cost (original transaction value) principle
3. The economic entity assumption
Brief Exercise 1-5
1. Disagree The full disclosure principle
2. Agree The periodicity assumption
3. Disagree The matching principle
4. Agree The realization (revenue recognition) principle 
EXERCISES
Exercise 1-1
Requirement 1

Pete, Pete, and Roy
Operating Cash Flow
Year 1 Year 2
Cash collected $160,000 $190,000
Cash disbursements:
  Salaries (90,000) (100,000)
  Utilities (30,000) (40,000)
  Purchase of insurance policy (60,000)      - 0 -    
      Net operating cash flow $(20,000) $ 50,000
Requirement 2

Pete, Pete, and Roy
Income Statements
Year 1 Year 2
Revenues $170,000 $220,000
Expenses:
  Salaries (90,000) (100,000)
  Utilities (35,000) (35,000)
  Insurance (20,000) (20,000)
          Net Income $ 25,000 $ 65,000
         
Requirement 3
Year 1: Amount billed to customers $170,000
 Less: Cash collected (160,000)
     Ending accounts receivable $  10,000

Year 2: Beginning accounts receivable $  10,000
 Plus: Amounts billed to customers  220,000
$230,000
 Less: Cash collected (190,000)
   Ending accounts receivable $  40,000

Exercise 1-2
Requirement 1

Year 2 Year 3
Revenues $350,000 $450,000
Expenses:
  Rent ($80,000  2) (40,000) (40,000)
  Salaries (140,000) (160,000)
  Travel and entertainment (30,000) (40,000)
  Advertising (25,000) (20,000)*
          Net Income $115,000 $190,000
         
Requirement 2
Amount owed at the end of year one $  5,000
Advertising costs incurred in year two  25,000
30,000
Amount paid in year two (15,000)
Liability at the end of year two 15,000
Less cash paid in year three (35,000)
Advertising expense in year three $20,000*














Exercise 1-3
Requirement 1
FASB ASC 820: “Fair Value Measurements and Disclosures”
Requirement 2
The specific citation that describes the information that companies must disclose about the use of fair value to measure assets and liabilities for recurring measurements is FASB ASC 820–10–50–2: “Fair Value Measurements and Disclosures-Overall-Disclosures.”

Requirement 3
The disclosure requirements are:

a. The fair value measurements at the reporting date
b. The level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using any of the following:
1.  Quoted market prices in active markets for identical assets or liabilities
     (Level 1).
2.  Significant other observable inputs (Level 2).
3.  Significant unobservable inputs (Level 3).
c. For fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to any of the following:
1.  Total gains and losses for the period (realized and unrealized), segregating 
    those gains or losses included in earnings (or changes in net assets) are 
              reported in the statement of income (or activities).
2.  Purchases, sales, issuances, and settlements (net).
3.  Transfers in and/or out of Level 3 (for example, transfers due to changes in
              the observability of significant inputs).
d. The amount of the total gains or losses for the period in (c)(1) included in earnings (or changes in net assets) that are attributable to the change in unrealized gains and losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains and losses are reported in the statement of income (or activities).
e. In annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period.

Exercise 1-4

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. The topic number for business combinations:

FASB ASC 805: “Business Combinations.”

2. The topic number for related party disclosures:

FASB ASC 850: “Related Party Disclosures.”

3. The topic, subtopic, and section number for the initial measurement of internal-use software:

 FASB ASC 350–40–30: “Intangibles–Goodwill and Other–Internal–Use Software–Initial Measurement.”

4. The topic, subtopic, and section number for the subsequent measurement of asset retirement obligations: 

FASB ASC 410–20–35: “Asset Retirement and Environmental Obligations–Asset Retirement Obligations–Subsequent Measurement.”

5. The topic, subtopic, and section number for the recognition of stock compensation:

 FASB ASC 718–10–25: “Compensation–Stock Compensation–Overall–Recognition.”

Exercise 1-5
            Organization Group
1. Securities and Exchange Commission Users
2. Financial Executives International Preparers
3. American Institute of Certified Public Accountants Auditors
4. Institute of Management Accountants Preparers
5. Association of Investment Management and Research Users

Exercise 1-6

1. Liability
2. Distribution to owners
3. Revenue
4. Assets, liabilities and equity
5. Comprehensive income
6. Gain
7. Loss
8. Equity
9. Asset
10. Net income
11. Investment by owner
12. Expense

Exercise 1-7
List A List B

  o   1. Predictive value a. Decreases in equity resulting from transfers to owners.
  h   2. Relevance b. Requires consideration of the costs and value of information.
  g   3. Timeliness c. Important for making interfirm comparisons.
  a   4. Distribution to owners d. Applying the same accounting practices over time.
  j     5. Confirmatory value e. Users understand the information in the context of the 
decision being made.
    e     6. Understandability f. Agreement between a measure and the phenomenon it purports to represent.
  n   7. Gain g. Information is available prior to the decision.
  f   8. Faithful representation h. Pertinent to the decision at hand.
  k   9. Comprehensive income i. Implies consensus among different measurers.
  p   10. Materiality j. Information confirms expectations.
  c   11. Comparability k. The change in equity from nonowner transactions.
  m   12. Neutrality l. The process of admitting information into financial statements.
  l     13. Recognition m. The absence of bias.
  d   14. Consistency n. Results if an asset is sold for more than its book value.
  b   15. Cost effectiveness o. Information is useful in predicting the future.
  i   16. Verifiability p. Concerns the relative size of an item and its effect on decisions.
Exercise 1-8

1. Materiality
2. Neutrality
3. Consistency
4. Timeliness
5. Predictive value and/or confirmatory value
6. Faithful Representation
7. Comparability
8. Cost effectiveness

Exercise 1-9
List A List B

  d   1. Matching principle a. The enterprise is separate from its owners and other entities.
  g   2. Periodicity b. A common denominator is the dollar.
  e     3. Historical cost principle c. The entity will continue indefinitely.
  i   4. Materiality d. Record expenses in the period the related revenue is recognized.
  h   5. Realization principle e. The original transaction value upon acquisition.
  c   6. Going concern assumption f. All information that could affect decisions should be reported.
  b   7. Monetary unit assumption g. The life of an enterprise can be divided into artificial time periods.
  a   8. Economic entity assumption h. Criteria usually satisfied at point of sale.
  f   9. Full-disclosure principle i. Concerns the relative size of an item and its effect on decisions.
Exercise 1-10

1. The economic entity assumption
2. The periodicity assumption
3. The matching principle (also the going concern assumption)
4. The historical cost (original transaction value) principle
5. The realization (revenue recognition) principle
6. The going concern assumption
7. Materiality

Exercise 1-11

1. The historical cost (original transaction value) principle
2. The periodicity assumption
3. The realization (revenue recognition) principle
4. The economic entity assumption
5. The matching principle; materiality
6. The full disclosure principle


Exercise 1-12

1. Disagree Monetary unit assumption
2. Disagree Full disclosure principle
3. Agree The matching principle
4. Disagree Historical cost (original transaction value) principle
5. Agree Realization (revenue recognition) principle
6. Agree Materiality
7. Disagree Periodicity assumption

Exercise 1-13

1. Disagree This is a violation of the historical cost (original
                             transaction value) principle.
2. Disagree This is a violation of the economic entity assumption.
3. Disagree This is a violation of the realization (revenue recognition)
                             principle.
4. Agree The company is conforming to the matching principle.
5. Agree The company is conforming to the full disclosure principle.
6. Disagree This is a violation of the periodicity assumption.
Exercise 1-14
 Statement Assumption, Principle, Constraint
1. f. Realization principle
2. h. Full-disclosure principle
3. g. Matching principle
4. e. Historical cost principle
5. c. Periodicity assumption
6. a. Economic entity assumption
7. i. Cost effectiveness
8. j. Materiality
9. k. Conservatism
10. b. Going concern assumption
11. d. Monetary unit assumption


Exercise 1-15

1. b
2. d
3. c
4. d
5. b
6. b

CPA / CMA REVIEW QUESTIONS
CPA Exam Questions

1. a. Auditor independence is not a qualitative characteristic.

2. b.   Neutrality is an attribute of faithful representation.

3. b. The FASB is a private body, though the SEC has the ultimate authority to set accounting standards. The FASB does not set auditing standards nor does it consist entirely of the members of the American Institute of CPAs.

4. a. Confirmatory value is an ingredient of the primary quality of relevance.

5. d. Predictive value is an ingredient of relevance.

6. b. Completeness is an ingredient of faithful representation.

7. b. The objective of financial reporting is to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and other similar decisions.

8. d. Comprehensive income excludes only owner transactions.
  

CMA Exam Questions
1. b.  Accounting standards in the United States for nongovernmental entities are set primarily by private sector.  The principle standard setters are the FASB and the AICPA’s AcSEC.
2. c.  Verifiability implies a consensus among different measurers.  
3. c.  The four fundamental recognition criteria are: 1) the item meets the definition of an element of financial statements, 2) the item has an attribute measurable with sufficient reliability, 3) the information is relevant, and 4) the information is reliable.  In addition, revenue should be recognized when it is realized or realizable and earned. 
CASES
Judgment Case 1-1
Requirement 1
In the 1934 Securities Act, Congress gave the SEC the job of setting accounting and reporting standards for companies whose securities are publicly traded.  However, the SEC, a government appointed body, always has delegated the task of setting accounting standards to the private sector.  It is important to understand that the SEC delegated only the task, not the power, to set standards.  The power still lies with the SEC.  If the SEC does not agree with a particular standard promulgated by the private sector, it can, and has in the past, required a change in the standard.
Requirement 2
1. SEC employees may not have the expertise necessary to set accounting standards.
2. By delegating to a private sector body, the cost of setting accounting standards is not borne by taxpayers.
3. By delegating to a private sector body, standards may gain greater acceptance than if dictated by a public (government) body.
4. The SEC now has a buffer group between itself and concerned constituents.  The SEC avoids criticism if a mistake is made by the FASB.
Research Case 1-2
Requirement 2
The 1933 Act has two basic objectives:
1. To require that investors be provided with material information concerning securities offered for public sale; and
2. To prevent misrepresentation, deceit, and other fraud in the sale of securities.
Requirement 3
EDGAR: 
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission.  Publicly traded domestic companies use EDGAR to make the majority of their filings.  Form 10-K, or 10-KSB, which includes the annual report, is required to be filed on EDGAR.  Filings by foreign companies are not required to be filed on EDGAR, but some of these companies do so voluntarily.
Research Case 1-3
Requirement 1
The mission of the Financial Accounting Standards Board is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. 
Requirement 2
Answers to these questions will vary depending on the date the research is conducted.
Requirement 3
The FASB receives many requests for action on various financial accounting and reporting topics from all segments of a diverse constituency, including the SEC. The auditing profession is sensitive to emerging trends in practice, and consequently it is a frequent source of requests. Overall, requests for action include both new topics and suggested review or reconsideration of existing pronouncements.
The FASB is alert to trends in financial reporting through observation of published reports, liaison with interested organizations, and from recommendations from and discussions with the Emerging Issues Task Force. In addition, the staff receives many technical inquiries by letter and by telephone, which may provide evidence that a particular topic, or aspect of an existing pronouncement, has become a problem. The FASB also is alert to changes in the financial reporting environment
that may be brought about by new legislation or regulatory decisions.
The Board turns to many other organizations and groups for advice and information on various matters, including its agenda. Among the groups with which liaison is maintained are the Financial Accounting Standards Advisory Council, the Accounting Standards Executive Committee and Auditing Standards Board of the AICPA, and the appropriate committees of such organizations as the Association for Investment Management and Research, Financial Executives Institute, Institute of Management Accountants, and Robert Morris Associates.



.

Research Case 1-4
Requirement 1
The IASB is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world.
Requirement 2
The IASB has 14 Board members, each with one vote.
Requirement 3
The answers to this question will vary depending on the date the research is conducted.  In 2009, the chairman of the IASB was Sir David Tweedie.
Requirement 4
London, United Kingdom

Research Case 1-5
Requirement 2
In 1978, China’s enterprise reform program was initiated.  Prior to 1978, all business enterprises were state owned and run.  Now, China’s companies exhibit a considerable range of ownership structures.  For example, the Contract Responsibility System was introduced to provide financial incentives to both workers and managers of state-owned enterprises.  In addition, many state-owned enterprises were converted into companies with limited liabilities similar to corporations in the United States.
Requirement 3
The author feels that the accounting environment in China differs considerably from what is typically presumed by IAS.  In particular, the lack of independent/professional auditing in China implies that the proposed detailed IAS-based standards may be counterproductive in China.

Communication Case 1-6

In the long run, a company will be able to provide investors with a return only if it can generate a profit.  That is, it must be able to use the resources provided by investors and creditors to generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service.  If this excess cash can be generated, the marketplace is implicitly saying that society’s resources have been efficiently allocated.  The marketplace is assigning a value to the product or service that exceeds the value assigned to the resources used to produce that product or service.  Pollution costs to society should be borne by the company/individual causing the costs to be incurred.  If they are, and the pollution-causing company can still generate a profit, then society’s resources are still being allocated efficiently.  From this perspective, it appears that information on pollution costs is relevant information to financial statement users.
However, even though this information might be relevant, it would not possess faithful representation.  For example, how could we objectively measure the costs to society of dumping hazardous waste into a river?  Fish and other river-life will die, drinking water will contain more pollutants, and the river will be a less desirable place for recreation.  Some of these costs can be quantified (estimated), but others can’t.  
It is important that each student actively participate in the process of arriving at a solution.  Domination by one or two individuals should be discouraged.  Students should be encouraged to contribute to the group discussion by (a) offering information on relevant issues, and (b) clarifying or modifying ideas already expressed, or (c) suggesting alternative direction.


Communication Case 1-7
Suggested Grading Concepts and Grading Scheme:
Content  (70%)
30 Briefly outlines the standard setting process.
Role of FASB, SEC.
The process.

20 Explains the meaning of economic consequences.
20 Discusses the need to balance accounting
considerations and economic consequences.
70 points

Writing  (30%)
6 Terminology and tone appropriate to the audience of
a business journal.

12 Organization permits ease of understanding.
Introduction that states purpose.
Paragraphs that separate main points.

12 English
Sentences grammatically clear and well organized,
   concise.
Word selection.
Spelling.
Grammar and punctuation.
30 points






Ethics Case 1-8
Discussion should include these elements.

Auditors' Role in Examining Financial Statements:
The function of the auditor is to assure the fairness of financial statements and their compliance with GAAP, not the verification of account correctness.  As some items in financial statements are the result of estimates, auditors are unable to provide an opinion as to the exactness of an entity's financial position.  Auditing Standards suggest that "present fairly" correlates to presenting financial information that is believable, reliable, and not misleading to users of the financial statements. 
An auditor must provide an independent opinion on an entity's financial statements even though the entity pays the audit fee and the audit company performs other services such as the preparation of tax returns.  Sarbanes-Oxley significantly restricts the additional services that an auditor can perform for an audit client.

Who is affected?

Auditors
Company management
Company employees and labor unions
Current and future shareholders
Creditors
Financial analysts
Government entities
Society in general

Ethical Values:
Ethical values pertaining to auditor responsibility include honesty, integrity, and service to the public, lack of bias, independence in attitude as well as appearance, and quality of work in conducting the audit. The AICPA and most state Rules of Conduct demand these qualities of public auditors. 
Ethics Case 1-8 (concluded)

Ethical issues or challenges:
1. Pressure from management to bias the audit opinion by threatening to withhold audit fee payment, to hire another audit firm, or to assign tax preparation work to another audit firm.
2. Pressure from management to bias the audit opinion by providing an expensive gift or an outright bribe to the auditor.  Auditors should refuse all but nominal gifts from their clients.
3. Pressure to bias the audit opinion in favor of the client because the auditor, or family member, has a financial interest in the client beyond the audit fee.  The interest could be in the form of an investment or a loan to or from the client.
4. Pressure to bias the audit opinion in favor of the client because the auditor, or family member, has current or future employment or is in a position of influence with the client. 
5. An unfavorable opinion may provoke a lawsuit by investors and other injured parties against both the company and the auditors.  Fear of litigation may prompt the auditors to give a favorable or clean opinion, when misleading information exists in the financial statements.

Judgment Case 1-9
The two primary qualitative characteristics of accounting information are relevance and faithful representation.  However, these qualities often can conflict, requiring a trade-off between various degrees of relevance and faithful representation.  A forecast of a financial variable may possess a high degree of relevance to investors and creditors.  However, a forecast necessarily contains subjectivity in the estimation of future events.  Since a forecast is involved, information could be more easily biased and may contain material errors.  Therefore, generally accepted accounting principles do not require companies to provide forecasts of any financial variables.
Judgment Case 1-10
Requirement 1
Mary will be able to compare the financial statements due to the existence of generally accepted accounting principles (GAAP).  These are a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
Requirement 2
Auditors examine financial statements to express an opinion on their compliance with GAAP.
Judgment Case 1-11
Requirement 1
The desired benefit is that the new standard will provide a better set of information to external users.  This will then increase the efficiency of the resource allocation process.  Better is defined by the FASB in terms of an appropriate combination of relevance and faithful representation.
Requirement 2
The costs could include increased information-gathering, processing and dissemination costs to the companies affected, increased interpreting costs to users, and adverse economic consequences to the companies, their investors, creditors, employees, other interest groups as well as to society as a whole.
Requirement 3
The FASB undertakes a series of elaborate information gathering steps before issuing a substantive accounting standard.  These steps include open hearings, deliberations, and requests for written comments.  These steps provide information to the FASB as to the possible benefits and costs of the new standard.
Judgment Case 1-12
Requirement 1
The realization principle requires that two criteria be satisfied before revenue can be recognized:
1. The earnings process is judged to be complete or virtually complete.
2. There is reasonable certainty as to the collectibility of the asset to be received (which is usually cash).
Requirement 2
Disagree.  The second criterion necessary for revenue recognition has been satisfied.  However, the earnings process is not complete.  Revenue should be recognized over the rental period, not at the beginning of the period.

Analysis Case 1-13
Requirement 1
The term matched with revenues means that an attempt is made to recognize expenses in the same period as the related revenues.  Implicit in this definition is a cause-and-effect relationship between revenue and expense.  However, difficulties arise in trying to identify cause-and-effect relationships.  Many expenses are not directly incurred because of a revenue event.
Requirement 2
The four different approaches to implementing the matching principle are:
1. Recognizing an expense based on an exact cause-and-effect relationship between a revenue and expense event.  Cost of goods sold is an example of an expense recognized by this approach.
2. Recognizing an expense by identifying the expense with the revenues recognized in a specific time period.  Office salaries is an example of an expense recognized by this approach.
3. Recognizing an expense by a systematic and rational allocation to specific time periods.  Depreciation is an example of an expense recognized by this approach.
4. Recognizing expenses in the period incurred, without regard to related revenues.  Advertising is an example of an expense recognized by this approach.
Analysis Case 1-13 (concluded)
Requirement 3
a. The cost of producing a product - 1.
b. The cost of advertising - 4.
c. The cost of monthly rent on the office building - 2.
d. The salary of an office employee - 2.
e. Depreciation on an office building - 3.

Judgment Case 1-14
Requirement 1
The key factor is whether or not the expenditure creates a benefit beyond the current period.  If it does, then the expenditure should be capitalized and expensed in future periods when the benefits from that asset are realized.  For example, if the expenditure is for the purchase of a machine that will be used for five years to produce products, the expenditure creates future benefits and should be capitalized.
On the other hand, if the expenditure is for this month’s rent, no benefits beyond the current period are created and the expenditure should be expensed now.
Requirement 2
The key accounting principle related to this decision is the matching principle, which states that expenses are recognized in the same period as the related revenues.
 Requirement 3
Yes, the materiality constraint.  If an expenditure creates a benefit beyond the current period but the amount is below the materiality threshold, companies often expense rather than capitalize.

Real World Case 1-15
Requirement 1
a. Total net revenues = $ 14,526 million
b. Total operating expenses = $   3,899 million
c. Net income (earnings) = $      967 million
d. Total assets = $   7,564 million
e. Total stockholders' equity = $   4,387 million
Requirement 2
The balance sheet reports 1,105 million shares of common stock issued as of January 31, 2009.
Requirement 3
The presentation of more than one year facilitates the ability of investors and creditors to compare the profitability of the company over time.  This, in turn, provides important information for predicting future results.

Solutions Manual Test Bank Cost Accounting A Managerial Emphasis 13e Charles T. Horngren

Solutions Manual Test Bank Cost Accounting A Managerial Emphasis 13e Charles T. Horngren

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Sample chapter:

CHAPTER 1 THE ACCOUNTANT’S ROLE IN THE ORGANIZATION

See the front matter of this Solutions Manual for suggestions regarding your choices of assignment material for each chapter.

1-1 Management accounting measures, analyzes and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the past), and (2) management accounting influences the behavior of managers and other employees (rather than primarily reporting economic events).

1-2 Financial accounting is constrained by generally accepted accounting principles. Management accounting is not restricted to these principles. The result is that
management accounting allows managers to charge interest on owners’ capital to help judge a division’s performance, even though such a charge is not allowed under GAAP,
management accounting can include assets or liabilities (such as “brand names” developed internally) not recognized under GAAP, and
management accounting can use asset or liability measurement rules (such as present values or resale prices) not permitted under GAAP.

1-3 Strategic cost management describes cost management that specifically focuses on strategic issues. Management accountants help formulate strategy by helping managers answer questions such as:
Who are our most important customers, and how do we deliver value to them? For example, after Amazon.com’s success in selling books online, Barnes and Noble developed the capabilities to sell online by building its information and technology infrastructure.
What substitute products exist in the marketplace, and how do they differ from our product in terms of price and quality? For example, Hewlett-Packard designs new printers after comparing the quality, price, and functionality of its printers to other printers in the marketplace.
What is our most critical capability? Is it technology, production, or marketing? How can we leverage it for new strategic initiatives? For example, Kellogg Company uses the reputation of its brand to introduce new cereals.
Will adequate cash be available to fund the strategy, or will additional funds need to be raised? For example, Proctor & Gamble issued new debt and equity to fund its strategic acquisition of Gillette.


1-4 The business functions in the value chain are
Research and development—generating and experimenting with ideas related to new products, services, or processes.
Design of products, services, and processes—the detailed planning and engineering of products, services, or processes.
Production—acquiring, coordinating, and assembling resources to produce a product or deliver a service.
Marketing—promoting and selling products or services to customers or prospective customers.
Distribution—delivering products or services to customers.
Customer service—providing after-sale support to customers.

1-5 Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all companies in the supply chain as well as across each business function in an individual company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.

1-6 “Management accounting deals only with costs.” This statement is misleading at best, and wrong at worst. Management accounting measures, analyzes, and reports financial and non-financial information that helps managers define the organization’s goals, and make decisions to fulfill them. Management accounting also analyzes revenues from products and customers in order to assess product and customer profitability. Therefore, while management accounting does use cost information, it is only a part of the organization’s information recorded and analyzed by management accountants.

1-7 Management accountants can help improve quality and achieve timely product deliveries by recording and reporting an organization’s current quality and timeliness levels and by analyzing and evaluating the costs and benefits—both financial and non-financial—of new quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer service.

1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2) obtain information (3) make predictions about the future (4) make decisions by choosing among alternatives and (5) implement the decision, evaluate performance and learn.

1-9 Planning decisions focus on (a) selecting organization goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and (b) communicating the goals and how to attain them to the entire organization.
Control decisions focus on (a) taking actions that implement the planning decisions, and (b) deciding how to evaluate performance and providing feedback and learning to help future decision making.

1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as understanding the strategy of an organization) and people skills (such as motivating other team members) as well as technical skills (such as computer knowledge, calculating costs of products, and supporting planning and control decisions).

1-12 The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the plant controller was viewed as a resource rather than a deadweight. In a related way, the plant controller could show how the plant manager’s time and resources could be saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the plant. This approach may involve doing background reading. It certainly will involve spending much time on the plant floor speaking to plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in working with line managers in other plants. Examples could include
assistance in preparing the budget,
assistance in analyzing problem situations and evaluating financial and nonfinancial aspects of different alternatives, and
assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the new plant controller. This approach is a last resort but may be necessary in some cases.

1-13 IMA stands for the Institute of Management Accountants. It is the largest association of management accountants in the United States. The CMA (Certified Management Accountant) is the professional designation for management accountants and financial executives. It demonstrates that the holder has met the admission criteria and demonstrated the competency of management accounting knowledge required by the IMA.

1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for management accountants in the following areas:
Competence
Confidentiality
Integrity
Credibility

1-15 Steps to take when established written policies provide insufficient guidance are
(a) Discuss the problem with the immediate superior (except when it appears that the superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics Counselor or other impartial advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical conflicts.


1-16 (15 min.) Value chain and classification of costs, computer company.

Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.

g.
h. Production
Distribution
Design of products, services or processes
Research and Development
Customer Service or Marketing
Design of products, services or processes
(or Research and Development)
Marketing
Production

1-17 (15 min.) Value chain and classification of costs, manufacturing company.

Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h. Design of products, services or processes
Marketing
Customer Service
Research and Development
Marketing
Production
Marketing
Distribution

1-18 (15 min.) Value chain and classification of costs, fast food restaurant.

Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
          g.
h. Production
Distribution
Marketing
Marketing
Marketing
Production
Design of products, services or processes
Customer service

1-19 (15 min.) Value chain, supply chain, and key success factors.

Change in
Management Accounting
Key Theme
a.
b.
c.
d.
e. Value-chain analysis
Key success factors (cost and quality)
Key success factors (cost)
Supply-chain analysis
Key success factors (time)
1-20 (10–15 min.) Planning and control decisions.

Action Decision
a.
b.
c.
d.
e. Planning
Control
Control
Planning
Planning

1-21 (15 min.) Five-step decision-making process, manufacturing.

Action Step in Decision-Making Process
a.
b.
c.
d.
          e.
f.
          g.
          Obtain information
Make predictions about the future
Identify the problem and uncertainties
Implement the decision, evaluate performance, and learn
Make predictions about the future
Make decisions by choosing among alternatives
Obtain information

1-22 (15 min.) Five-step decision-making process, service firm.

Action Step in Decision-Making Process
a.
b.
c.
d.
          e.
f.
          g.
. Obtain information
Identify the problem and uncertainties
Make predictions about the future
Implement the decision, evaluate performance, and learn
Make predictions about the future
Obtain information
Make decisions by choosing among alternatives

1-23 (10–15 min.) Professional ethics and reporting division performance.

1. Wiggin’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility include the following:

competence
confidentiality
integrity
credibility


The ethical standards related to Wiggin’s current dilemma are integrity, competence and credibility. Using the integrity standard, Wiggin should carry out duties ethically and communicate unfavorable as well as favorable information and professional judgments or opinions. Competence demands that Wiggin perform her professional duties in accordance with relevant laws, regulations, and technical standards. Credibility requires that Wiggin report information fairly and objectively. Wiggin should refuse to book the $425,000 of sales until the goods are shipped. Both financial accounting and management accounting principles maintain that sales are not complete until the title is transferred to the buyer.

2. Wiggin should refuse to follow Thibeault’s orders. If Thibeault persists, the incident should be reported to the corporate controller. Support for line management should be wholehearted, but it should not require unethical conduct.

1-24 (15 min.) Planning and control decisions, Internet company.

1. Planning decisions
a. Decision to raise monthly subscription fee
c. Decision to upgrade content of online services (later decision to inform subscribers and upgrade online services is an implementation part of control)
e. Decision to decrease monthly subscription fee

Control decisions
b. Decision to inform existing subscribers about the rate of increase—an implementation part of control decisions
d. Dismissal of VP of Marketing—performance evaluation and feedback aspect of control decisions

2. Other planning decisions that may be made at WebNews.com: decision to raise or lower advertising fees; decision to charge a fee from on-line retailers when customers click-through from WebNews.com to the retailers’ websites.
Other control decisions that may be made at WebNews.com: evaluating how customers like the new format for the weather information, working with an outside vendor to redesign the website, and evaluating whether the waiting time for customers to access the website has been reduced.


1-25 (20 min.) Strategic decisions and management accounting.

1. The strategies the companies are following in each case are:
      a.
      b.
      c.
      d. Low price strategy
Differentiated product strategy
Low price strategy
Differentiated product strategy

2. Examples of information the management accountant can provide for each strategic decision follow.
      a.
   


   

      b.
   



   
      c.
   




      d. Cost to manufacture and sell the line of cutlery
Productivity, efficiency and cost advantages relative to competition
Prices of competitive lines of cutlery
Sensitivity of target customers to price and quality
The production capacity of Camilla Cutler and its competitors

Cost to develop, produce and sell new window blinds
Premium price that customers would be willing to pay due to product uniqueness
Price of basic window blinds
Price of closest competitive window blinds
Cash needed to develop, produce and sell new window blinds

Cost of producing the chain “store-brand” vacuum cleaners
Productivity, efficiency and cost advantages relative to competition
Prices of competitive products
Sensitivity of target customers to price and quality
How the market for vacuum cleaners is growing

Cost to produce and sell new line of gourmet muffins
Premium price that customers would be willing to pay due to product uniqueness
Price of basic muffin
Price of closest competitive product

1-26 (15 min.) Management accounting guidelines.

1. Cost-benefit approach
2. Behavioral and technical considerations
3. Different costs for different purposes
4. Cost-benefit approach
5. Behavioral and technical considerations
6. Cost-benefit approach
7. Behavioral and technical considerations
8. Different costs for different purposes
9. Behavioral and technical considerations


1-27 (15 min.) Role of controller, role of chief financial officer.
1.
Activity Controller CFO
Managing accounts receivable X
Communicating with investors X
Strategic review of different lines of businesses X
Budgeting funds for a plant upgrade X
Managing the company’s supplier credit policy X
Negotiating fees with auditors X
Assessing profitability of various products X
Evaluating the costs and benefits of a new product design X

2. As CFO, Arabella Lundquist will be interacting much more with the senior management of the company, the board of directors, and the external financial community. Any experience she can get with these aspects will help her in her new role as CFO. Arabella Lundquist can be better positioned for her new role as CFO by participating in strategy discussions with senior management, by preparing the external investor communications and press releases under the guidance of the current CFO, by attending courses that focus on the interaction and negotiations between the various business functions and, either formally or on the job, getting training in issues related to investments and corporate finance.

1-28 (30 min.) Software procurement decisions, ethics.

1. Michael faces an ethical problem. The trip appears to be a gift which could influence his purchase decision. The ethical standard of integrity requires Michaels to refuse the gift. Companies with “codes of conduct” frequently have a “supplier clause” that prohibits their employees from accepting “material” (in some cases, any) gifts from suppliers. The motivations include
(a) Integrity/conflict of interest. Suppose Michaels recommends that a Horizon 1-2-3 product should subsequently be purchased by Fiesta. This recommendation could be because he felt obligated to them as his trip to the Cancún conference was fully paid by Horizon.
(b) The appearance of a conflict of interest.  Even if the Horizon 1-2-3 product is the superior one at that time, other suppliers likely will have a different opinion. They may believe that the way to sell products to Fiesta is via “fully-paid junkets to resorts.” Those not wanting to do business this way may downplay future business activities with Fiesta even though Fiesta could gain much from such activities.

Some executives view the meeting as “suspect” from the start given the Caribbean location and its “rest and recreation” tone.

2. Fiesta should not allow executives to attend user meetings while negotiating with other vendors about a purchase decision. The payment of expenses for the trip constitutes a gift that could appear to influence their purchase decision.


Pros of attending user meeting
(a) Opportunity to learn more about Horizon’s software products.
(b) Opportunity to interact with other possible purchasers and get their opinions.
(c) Opportunity to influence the future product development plans of Horizon in a way that will benefit Fiesta. An example is Horizon subsequently developing software modules tailored to food product companies.
(d) Saves Fiesta money. Visiting suppliers and their customers typically cost money, whereas Horizon is paying for the Cancún conference.

Cons of Attending
(a) The ethical issues raised in requirement 1.
(b) Negative morale effects on other Fiesta employees who do not get to attend the Cancún conference. These employees may reduce their trust and respect for Michaels’s judgment, arguing he has been on a “supplier-paid vacation.”

Conditions on Attending that Fiesta Might Impose
(a) Sizable part of that time in Cancún has to be devoted to business rather than recreation.
(b) Decision on which Fiesta executive attends is not made by the person who attends (this reduces the appearance of a conflict of interest).
(c) Person attending (Michaels) does not have final say on purchase decision (this reduces the appearance of a conflict of interest).
(d) Fiesta executives go only when a new major purchase is being contemplated (to avoid the conference becoming a regular “vacation”).
A Conference Board publication on Corporate Ethics asked executives about a comparable situation. Following are the results:

76% said Fiesta and Michaels face an ethical consideration in deciding whether to attend.
71% said Michaels should not attend, as the payment of expenses is a “gift” within the meaning of a credible corporate ethics policy.

3. The company does not need its own code of ethics. They can use the code of ethics developed by the IMA.

Pros of having a written code
The Conference Board outlines the following reasons why companies adopt codes of ethics:

(a) Signals commitment of senior management to ethics.
(b) Promotes public trust in the credibility of the company and its employees.
(c) Signals the managerial professionalism of its employees.
(d) Provides guidance to employees as to how difficult problems are to be handled. If adhered to, employees will avoid many actions that are unethical or appear to be unethical.
(e) Drafting of the policy (and its redrafting in the light of ambiguities) can assist management in anticipating and preparing for ethical issues not yet encountered.

Cons of having a written code
(a) Can give appearance that all issues have been covered. Issues not covered may appear to be “acceptable” even when they are not.
(b) Can constrain the entrepreneurial activities of employees. Forces people to always “behave by the book.”
(c) Cost of developing code can be “high” if it consumes a lot of employee time.

1-29 (30–40 min.) Professional ethics and end-of-year actions.

1. The possible motivations for the air conditioning division wanting to take end-of-year actions include:
(a) Management incentives. Nations Appliance may have a division bonus scheme based on one-year reported division earnings. Efforts to front-end revenue into the current year or transfer costs into the next year can increase this bonus.
(b) Promotion opportunities and job security. Top management of Nations Appliance likely will view those division managers that deliver high reported earnings growth rates as being the best prospects for promotion. Division managers who deliver “unwelcome surprises” may be viewed as less capable.
(c) Retain division autonomy. If top management of Nations Appliance adopts a “management by exception” approach, divisions that report sharp reductions in their earnings growth rates may attract a sizable increase in top management supervision.

2. The “Standards of Ethical Conduct . . . ” require management accountants to
Perform professional duties in accordance with relevant laws, regulations, and technical standards.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Communicate information fairly and objectively.

Several of the “end-of-year actions” clearly are in conflict with these requirements and should be viewed as unacceptable by Malonson.
(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the close falsely reports next year’s sales as this year’s sales.
(c) Altering shipping dates is falsification of the accounting reports.
(f) Advertisements run in December should be charged to the current year. The advertising agency is facilitating falsification of the accounting records.

The other “end-of-year actions” occur in many organizations and fall into the “gray” to “acceptable” area. However, much depends on the circumstances surrounding each one, such as the following:
(a) If the independent contractor does not do maintenance work in December, there is no transaction regarding maintenance to record.  The responsibility for ensuring that assembly line equipment is well maintained is that of the plant manager. The division controller probably can do little more than observe the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year-end. If the 5% bonus is approved by the division marketing manager, the division controller can do little more than observe the extra bonus paid in December.
(e) If newspaper, television, and Internet ads are reduced in December, the advertising cost in December will be reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” cosignees to accept the merchandise. For example, if an under-the-table payment is involved, or if cosignees are pressured to accept merchandise, it is clearly unethical. If, however, the cosignee receives no extra consideration and willingly agrees to accept the assignment because it sees potential sales opportunities in December, the transaction appears ethical.

Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Nations Appliance in the long run. For example, lack of routine maintenance may lead to subsequent equipment failure. The divisional controller is well advised to raise such issues in meetings with the division president. However, if Nations Appliance has a rigid set of line/staff distinctions, the division president is the one who bears primary responsibility for justifying division actions to senior corporate officers.

3. If Malonson believes that Patterson wants him to engage in unethical behavior, he should first directly raise her concerns with Patterson. If Patterson is unwilling to change her request, Malonson should discuss his concerns with the Corporate Controller of Nations Appliance. He could also initiate a confidential discussion with an IMA Ethics Counselor, other impartial adviser, or his own attorney. Malonson also may well ask for a transfer from the air conditioning division if he perceives Patterson is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even President of Nations Appliance.  In the extreme, he may want to resign if the corporate culture of Nations Appliance is to reward division managers who take “end-of-year actions” that Malonson views as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s books and misleading investors.

1-30 (30 min.) Professional ethics and earnings management.

1. The possible motivations for Harvest Day Corporation’s CEO to “manage” earnings include
(a) Manage the stock price.  Harvest Day’s CEO wants to meet the forecasted earnings number of $1.34 per share because the CEO believes that the stock price will drop if actual earnings fall short of the forecast .
(b) Job security.  The CEO may be concerned that the Board of Directors may have a poor view of him if he delivers “unwelcome surprises”.  Depending on how much the stock falls, they may even consider dismissing him.
(c) Management incentives.  The bonuses of top management and the CEO may be based on earnings.  If earnings decrease, smaller or no bonuses may be paid.  If top management and the CEO have stock options, the value of these options will be adversely affected if the stock price falls.

2. The “Standards for Ethical Conduct…” requires management accountants to
Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Communicate information fairly and objectively.

Several of the “end of fiscal year actions” clearly are in conflict with these requirements and should be viewed as unacceptable.
(a) Subscriptions cancelled in December should be recorded in December itself and not delayed until January.
(c) Subscription revenue received in December in advance for magazines that will be sent out in January is a liability.  Showing it as revenue falsely reports next year’s revenue as this year’s revenue.
(d) Office supplies purchased in December should be recorded as an expense of the current year and not as an expense of the next year.
(e) Booking advertising revenues that relate to January in December falsely reports next year’s revenue as this year’s revenue.

The other “end of fiscal year actions” occur in many organizations and fall into the “gray” to “acceptable” area.  Much depends on the circumstances surrounding each one, however, such as the following:
(b) If the software on office computers is not updated until January, there is no transaction or expense to record in December.  The responsibility for ensuring that the software is updated is that of the chief information technology officer.  The controller can do little more than observe the absence of a December software update and question whether this will have an adverse long-term impact on Harvest Day.
(f) If building repairs are not done in December, there is no transaction to record in December.  There is no record falsification here.  The decision regarding when to do building repairs is made by the operations manager.
(g) Many companies switch their depreciation policy from one method to another.  Harvest Day could argue that straight-line depreciation better represents the decrease in the economic value of the asset compared to the declining balance method.  Straight-line depreciation may also be more in line with what its competitors do.  If, however, Harvest Day changes to straight-line depreciation with the sole purpose of reducing expenses to meet its earnings goal, such behavior would be unacceptable.  The Standards of Ethical Behavior require management accountants to communicate information fairly and objectively and to carry out duties ethically.

3. Harvest Day’s controller should directly raise his/her concerns with the CEO.  If the CEO refuses to change his request, the Controller should raise these issues with the Audit Committee and the Board of Directors.  The Controller could also initiate a confidential discussion with an IMA Ethics Counselor, other impartial adviser, or his/her own attorney.  In the extreme, the Controller may want to resign if the corporate culture of Harvest Day is to reward executives who take “end of fiscal year actions” that the Controller views as unethical and possibly illegal.  It was precisely actions along the lines of (a), (c), (d), and (e) that caused Betty Vinson, an accountant at WorldCom, to be indicted for falsifying WorldCom’s books and misleading investors.


1-31 (40 min.) Global company, ethical challenges with bribery.

1. It is clear that bribes are illegal according to U.S. laws. It is not clear from the case whether bribes are illegal in Malia. However, knowledgeable people in global business would attest to the fact that it is virtually impossible to find any country in the world that specifically sanctions bribery. The major point, however, that deserves discussion is: Should Zafron engage in any unethical activities even if they are not illegal?
It is difficult to make a generalization about all shareholders of the company. It is, however, safe to assume that not all shareholders would want to keep their investment in a company that is engaged in unethical and/or illegal activities. There is historical evidence to substantiate this point: When apartheid laws were in effect in South Africa, many investors divested shares of companies doing business in South Africa.

2. Apparently Alan thinks that local culture and common practice are one and the same. This, in fact, is not the case. There are many common practices in developing countries, which are against the native culture.
Specifically, bribery often leads to decisions that are not made on the basis of the merits of the alternative selected. This results in misallocation of meager resources of the developing country. Misallocation of resources has adverse effects on the economy of a country and the living standard of its population. The negative impact is intensified in developing countries because they can least afford the misallocation of resources.
As it applies to local common practice, multinational companies make some small allowances but draw a hard line against paying the $1 million “commission.”

3. Zafron might have an articulated corporate policy against such payments to get the message across that regardless of laws, the top management would not tolerate any bribery payments made by its employees. A strong and consistent message from the top often has a noticeable effect on the corporate culture and employee behavior.
U.S. laws specifically prohibit bribery payments. Such payments can result in heavy penalties to the corporation making the payments.

4. If this contract is of great importance to Zafron’s global strategy, it is likely that this kind of issue will come up again as Zafron expands into very diverse cultures and the company should tackle it head on and make a policy decision against offering bribes. Chris Huang should discuss the situation with the top management at Zafron and re-affirm his goal to get the Malia contract by legal means. He could seek the help of the U.S. commercial attaché in Malia to continue a dialogue with Malia’s deputy minister of power generation. He could propose other creative, legal changes to the Zafron’s bid, even at the cost of reducing the profitability of the current project. Concessions such as training programs, schools and other public works projects may be legal, get the attention of the Malia government and raise Zafron’s profile both at home and abroad. In the worst case, if the Malia government does not agree to any of the creative, legal “extras” that Zafron can provide in order to win the contract, Huang should report this to Zafron’s management and be willing to walk away from the Malia project.