Economics
Major points are supported by the following:
• Textbook or articles (2 citations);
• Good examples (pertinent, conceptual, or personal examples are acceptable);
• Thoughtful analysis (considering assumptions, analyzing implications, comparing/contrasting concepts).
Choose ONE of the following questions and answer it in a 400 words discussion board post. Then write 2 other posts (200 words each) commenting or giving your opinion on the 400 words post like if it was someone else commenting and giving their opinion on the 400 words post.
Question One:
Assume you work as an accountant in the merchandising division of a large public company that makes and sells athletic clothing. To encourage the merchandising division to earn as much profit on each individual sale as possible, the division manager’s pay is based, in part, on the division’s gross profit percentage. To encourage control over the division’s operating expenses, the manager’s pay also is based on the division’s net income.
You are currently preparing the division’s financial statements. The division had a good year, with sales of $100,000, cost of goods sold of $50,000, sales returns and allowances of $6,000, sales discounts of $4,000, and other selling expenses of $30,000. (Assume the division does not report income taxes.) The division manager stresses that “it would be in your personal interest” to classify sales returns and allowances and sales discounts as selling expenses rather than as contra-revenues on the division’s income statement. He justifies this “friendly advice” by saying that he’s not asking you to fake the numbers—he just believes that those items are more accurately reported as expenses. Plus, he claims, being a division of a larger company, you don’t have to follow GAAP.
Required:
1. Prepare an income statement for the division using the classifications shown in this chapter. Using this income statement, calculate the division’s gross profit percentage.
2. Prepare an income statement for the division using the classifications advised by the manager. Using this income statement, calculate the division’s gross profit percentage.
3. What reason (other than reporting “more accurately”) do you think is motivating the manager’s advice to you?
4. Do you agree with the manager’s statement that “he’s not asking you to fake the numbers”?
5. Do you agree with the manager’s statement about not having to follow GAAP?
6. How should you respond to the division manager’s “friendly advice”?
7.
Question Two:
Mandalay Industries is a private company that sells electronic test equipment. During the year 2013, the inventory records reflected the following:
To minimize income taxes, inventory is valued at cost using the LIFO inventory method. On December 28, 2013, Mandalay’s supplier increased the unit cost of new test equipment to $15,000.
Required:
1. Determine the company’s Income from Operations and the cost of ending inventory. The company’s operating expenses (excluding Cost of Goods Sold) were $300,000 and the company applies LIFO with a periodic inventory system.
2. Mandalay’s management is considering buying 20 additional units on December 31, 2013, at $15,000 each. Redo the income statement and ending inventory calculations, assuming that this purchase is made on December 31, 2013.
3. How much did Income from Operations change because of the decision to purchase additional units on December 31, 2013? Is there any evidence of deliberate income manipulation? Is this tax fraud? Explain.
Question Three:
David Exler is the CEO of AquaGear Enterprises, a seven-year-old manufacturer of boats. After many long months of debate with the company’s board of directors, David obtained the board’s approval to expand into water ski sales. David firmly believed that AquaGear could generate significant profits in this market, despite recent increases in the cost of skis. A board meeting will be held later this month for David to present the financial results for the first quarter of ski sales. As AquaGear’s corporate controller, you reported to David that the results weren’t great. Although sales were better than expected at $165,000 (3,000 units at $55 per unit), the cost of goods sold was $147,500. This left a gross profit of $17,500. David knew this amount wouldn’t please the board. Desperate to save the ski division, David asks you to “take another look at the cost calculations to see if there’s any way to reduce the cost of goods sold. I know you accountants have different methods for figuring things out, so maybe you can do your magic now when I need it most.” You dig out your summary of inventory purchases for the quarter to recheck your calculations, using the LIFO method that has always been used for the company’s inventory of boats.
Required:
1. Calculate Cost of Goods Sold using the LIFO method. Does this confirm the statement you made to David about the Gross Profit earned on water ski sales in the first quarter?
2. Without doing any calculations, is it likely that any alternative inventory costing method will produce a lower Cost of Goods Sold? Explain.
3. Calculate Cost of Goods Sold using the FIFO method. Would use of this method solve David’s current dilemma?
4. Is it acceptable within GAAP to report the water skis using one inventory costing method and the boats using a different method?
5. Do you see any problems with using the FIFO numbers for purposes of David’s meeting with the board?
