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 inestors, goernment agencies, and banks. It measures and records business transactions and proides financial statements that are based on generally accepted accounting principles (GAAP). !ther differences include (") management accounting emphasizes the future (not the past), and (#) management accounting influences the behaior of managers and other employees (rather than primarily reporting economic eents). 1-2 $inancial accounting is constrained by generally accepted accounting principles. %anagement accounting is not restricted to these principles. &he result is that management accounting allo's managers to charge interest on o'ners( capital to help )udge a diision(s performance, een though such a charge is not allo'ed under GAAP, management accounting can include assets or liabilities (such as *brand names+ deeloped internally) not recognized under GAAP, and management accounting can use asset or liability measurement rules (such as present alues or resale prices) not permitted under GAAP. 1-3 %anagement accountants can help to formulate strategy by proiding information about the sources of competitie adantage,for example, the cost, productiity, or efficiency adantage of their company relatie to competitors or the premium prices a company can charge relatie to the costs of adding features that make its products or serices distinctie. 1-4 &he business functions in the alue chain are Research and develo!en",generating and experimenting 'ith ideas related to ne' products, serices, or processes. Des#$n o% rod&c"s and rocesses,the detailed planning, engineering, and testing of products and processes. Prod&c"#on,procuring, transporting, storing and assembling resources to produce a product or delier a serice. Mar'e"#n$,promoting and selling products or serices to customers or prospectie customers. D#s"r#(&"#on,processing orders and shipping products or serices to customers. C&s"o!er serv#ce,proiding after-sales serice to customers. "-" 1-) Supply chain describes the flo' of goods, serices, and information from the initial sources of materials and serices to the deliery of products to consumers, regardless of 'hether those actiities occur in the same organization or in other organizations. .ost management is most effectie 'hen it integrates and coordinates actiities across all companies in the supply chain as 'ell as across each business function in an indiidual company(s alue chain. Attempts are made to restructure all cost areas to be more cost-effectie. 1-* *%anagement accounting deals only 'ith costs.+ &his statement is misleading at best, and 'rong at 'orst. %anagement accounting measures, analyzes, and reports financial and non- financial information that helps managers define the organization(s goals, and make decisions to fulfill them. %anagement accounting also analyzes reenues from products and customers in order to assess product and customer profitability. &herefore, 'hile management accounting does use cost information, it is only a part of the organization(s information recorded and analyzed by management accountants. 1-+ %anagement accountants can help improe /uality and achiee timely product delieries by recording and reporting an organization(s current /uality and timeliness leels and by analyzing and ealuating the costs and benefits,both financial and non-financial,of ne' /uality initiaties such as &0%, relieing bottleneck constraints or proiding faster customer serice. 1-, &he fie-step decision-making process is (") identify the problem and uncertainties (#) obtain information (1) make predictions about the future (2) make decisions by choosing among alternaties and (3) implement the decision, ealuate performance and learn. 1-- Planning decisions focus on selecting organization goals and strategies, predicting results under arious alternatie 'ays of achieing those goals, deciding ho' to attain the desired goals, and communicating the goals and ho' to attain them to the entire organization. Control decisions focus on taking actions that implement the planning decisions, deciding ho' to ealuate performance, and proiding feedback and learning to help future decision making. 1-1. &he three guidelines for management accountants are ". 4mploy a cost-benefit approach. #. 5ecognize behaioral and technical considerations. 1. Apply the notion of *different costs for different purposes+. 1-11 Agree. A successful management accountant re/uires general business skills (such as understanding the strategy of an organization) and people skills (such as motiating other team members) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products, and supporting planning and control decisions). "-# 1-12 &he ne' controller could reply in one or more of the follo'ing 'ays6 (a) 7emonstrate to the plant manager ho' he or she could make better decisions if the plant controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay, the plant controller could sho' ho' the plant manager(s time and resources could be saed by ie'ing the ne' plant controller as a team member. (b) 7emonstrate to the plant manager a good kno'ledge of the technical aspects of the plant. &his approach may inole doing background reading. It certainly 'ill inole spending much time on the plant floor speaking to plant personnel. (c) 8ho' the plant manager examples of the ne' plant controller(s past successes in 'orking 'ith line managers in other plants. 4xamples could include assistance in preparing the budget, assistance in analyzing problem situations and ealuating financial and nonfinancial aspects of different alternaties, and assistance in submitting capital budget re/uests. (d) 8eek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the ne' plant controller. &his approach is a last resort but may be necessary in some cases. 1-13 &he controller is the chief management accounting executie. &he corporate controller reports to the chief financial officer, a staff function. .ompanies also hae business unit controllers 'ho support business unit managers or regional controllers 'ho support regional managers in ma)or geographic regions. 1-14 &he Institute of %anagement Accountants (I%A) sets standards of ethical conduct for management accountants in the follo'ing four areas6 .ompetence .onfidentiality Integrity .redibility 1-1) 8teps to take 'hen established 'ritten policies proide insufficient guidance are (a) 7iscuss the problem 'ith the immediate superior (except 'hen it appears that the superior is inoled). (b) .larify releant ethical issues by confidential discussion 'ith an I%A 4thics .ounselor or other impartial adisor. (c) .onsult your o'n attorney as to legal obligations and rights concerning the ethical conflicts. "-1 1-1* ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 co!&"er co!an12 Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on a. b. c. d. e. f. g. h. Production 7istribution 7esign of products and processes 5esearch and 7eelopment .ustomer 8erice or %arketing 7esign of products and processes (or 5esearch and 7eelopment) %arketing Production 1-1+ ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 har!ace&"#cal co!an12 Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on a. b. c. d. e. f. g. h. 7esign of products and processes %arketing .ustomer 8erice 5esearch and 7eelopment %arketing Production %arketing 7istribution 1.18 ("3 min.) /al&e cha#n and class#%#ca"#on o% cos"s0 %as" %ood res"a&ran"2 Cos" I"e! /al&e Cha#n 3&s#ness 4&nc"#on a. b. c. d. e. f. g. h. Production 7istribution %arketing %arketing %arketing Production 7esign of products and processes (or 5esearch and 7eelopment) .ustomer serice 1-1- ("3 min.) 5e1 s&ccess %ac"ors2 Chan$e #n Oera"#ons6 Mana$e!en" Acco&n"#n$ 5e1 7&ccess 4ac"or a. b. c. d. e. Innoation .ost and 0uality &ime &ime and .ost .ost "-2 1-2. ("9-"3 min.) Plann#n$ and con"rol dec#s#ons2 Ac"#on Dec#s#on a. b. c. d. e. Planning .ontrol .ontrol Planning Planning 1-21 ("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 !an&%ac"&r#n$2 Ac"#on 7"e #n Dec#s#on-Ma'#n$ Process a. b. c. d. e. f. g.
!btain information %ake predictions about the future Identify the problem and uncertainties Implement the decision, ealuate performance, and learn %ake predictions about the future %ake decisions by choosing among alternaties !btain information 1-22 ("3 min.) 4#ve-s"e dec#s#on-!a'#n$ rocess0 serv#ce %#r!2 Ac"#on 7"e #n Dec#s#on-Ma'#n$ Process a. b. c. d. e. f. !btain information Identify the problem and uncertainties !btain information and:or make predictions about the future %ake predictions about the future !btain information %ake decisions by choosing among alternaties "-3 1-23 ("9;"3 min.) Pro%ess#onal e"h#cs and reor"#n$ d#v#s#on er%or!ance2 ". %iller(s ethical responsibilities are 'ell summarized in the I%A(s *8tandards of 4thical .onduct for %anagement Accountants+ (4xhibit "-< of text). Areas of ethical responsibility include the follo'ing6 competence confidentiality integrity credibility &he ethical standards related to %iller(s current dilemma are integrity, competence and credibility. =sing the integrity standard, %iller should carry out duties ethically and communicate unfaorable as 'ell as faorable information and professional )udgments or opinions. .ompetence demands that %iller perform her professional duties in accordance 'ith releant la's, regulations, and technical standards and proide decision support information that is accurate. .redibility re/uires that %iller report information fairly and ob)ectiely and disclose deficiencies in internal controls in conformance 'ith organizational policy and:or applicable la'. %iller should refuse to book the >#99,999 of sales until the goods are shipped. ?oth financial accounting and management accounting principles maintain that sales are not complete until the title is transferred to the buyer. #. %iller should refuse to follo' %aloney@s orders. If %aloney persists, the incident should be reported to the corporate controller. 8upport for line management should be 'holehearted, but it should not re/uire unethical conduct. 1-24 ("3 min.) Plann#n$ and con"rol dec#s#ons0 In"erne" co!an12 ". Plann#n$ dec#s#ons a. 7ecision to raise monthly subscription fee c. 7ecision to upgrade content of online serices (later decision to inform subscribers and upgrade online serices is an implementation part of control) e. 7ecision to decrease monthly subscription fee starting in Aoember. Con"rol dec#s#ons b. 7ecision to inform existing subscribers about the rate of increase,an implementation part of control decisions d. 7ismissal of BP of %arketing,performance ealuation and feedback aspect of control decisions #. !ther planning decisions that may be made at CebAe's.com6 decision to raise or lo'er adertising feesD decision to charge a fee from on-line retailers 'hen customers click-through from CebAe's.com to the retailers( 'ebsites. !ther control decisions that may be made at CebAe's.com6 ealuating ho' customers like the ne' format for the 'eather information, 'orking 'ith an outside endor to redesign the 'ebsite, and ealuating 'hether the 'aiting time for customers to access the 'ebsite has been reduced. "-E 1-2) (#9 min.) 7"ra"e$#c dec#s#ons and !ana$e!en" acco&n"#n$2 ". &he strategies the companies are follo'ing in each case are6 a. b. c. d. Fo' price strategy 7ifferentiated product strategy Fo' price strategy 7ifferentiated product strategy #. 4xamples of information the management accountant can proide for each strategic decision follo'. a.
b.
c.
d. .ost to manufacture and sell the cell phone Productiity, efficiency and cost adantages relatie to competition Prices of competitie cell phones 8ensitiity of target customers to price and /uality &he production capacity of 5oger Phones and its competitors .ost to deelop, produce and sell ne' soft'are Premium price that customers 'ould be 'illing to pay due to product uni/ueness Price of basic soft'are Price of closest competitie soft'are .ash needed to deelop, produce and sell ne' soft'are .ost of producing the *store-brand+ lip gloss Productiity, efficiency and cost adantages relatie to competition Prices of competitie products 8ensitiity of target customers to price and /uality Go' the market for lip gloss is gro'ing .ost to produce and sell ne' line of gourmet bologna Premium price that customers 'ould be 'illing to pay due to product uni/ueness Price of basic meat product Price of closest competitie product 1-2* ("3 min.) Mana$e!en" acco&n"#n$ $&#del#nes2 ". .ost-benefit approach #. ?ehaioral and technical considerations 1. 7ifferent costs for different purposes 2. .ost-benefit approach 3. ?ehaioral and technical considerations E. .ost-benefit approach <. ?ehaioral and technical considerations H. 7ifferent costs for different purposes I. ?ehaioral and technical considerations "-< 1-2+ ("3 min.) Role o% con"roller0 role o% ch#e% %#nanc#al o%%#cer2 ". Ac"#v#"1 Con"roller C4O %anaging accounts payable J .ommunicating 'ith inestors J 8trategic reie' of different lines of businesses J ?udgeting funds for a plant upgrade J %anaging the company(s short-term inestments J Aegotiating fees 'ith auditors J Assessing profitability of arious products J 4aluating the costs and benefits of a ne' product design J #. As .$!, Perez 'ill be interacting much more 'ith the senior management of the company, the board of directors, auditors, and the external financial community. Any experience he can get 'ith these aspects 'ill help him in his ne' role as .$!. George Perez can be better positioned for his ne' role as .$! by participating in strategy discussions 'ith senior management, by preparing the external inestor communications and press releases under the guidance of the current .$!, by attending courses that focus on the interaction and negotiations bet'een the arious business functions and outside parties such as auditors and, either formally or on the )ob, getting training in issues related to inestments and corporate finance. "-H 1-2, (19 min.) Phar!ace&"#cal co!an10 (&d$e"#n$0 e"h#cs2 ". &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith releant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ectiely. 7isclose all releant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations. &he idea of capitalizing some of the company(s 5L7 expenditures is a direct iolation of the I%A(s ethical standards aboe. &his transaction 'ould not be *in accordance 'ith releant la's, regulations, and technical standards+. Generally Accepted Accounting Principles re/uire research and deelopment costs to be expensed as incurred. 4en if Mohnson beliees his transaction is )ustifiable, it iolates the profession(s technical standards and 'ould be unethical. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+ area. %uch depends on the circumstances surrounding each one, ho'eer, such as the follo'ing6 a. Stop all research and development eforts on the drug Lyricon until after year-end. This change would delay the drug going to market by at least six months. It is also possible that in the meantime a harma!or competitor could make it to market with a similar drug. Chile this solution may sole the budget short-fall in this year, it could result in a significant loss of future profits for Pharma.or in the long-run, especially if a competitor is able to obtain a patent on a similar drug before Pharma.or. b. Sell off rights to the drug, Markapro. The company had not planned on doing this because, under current market conditions, it would get less than fair alue. !t would, howeer, result in a onetime gain that could offset the budget short-fall. "f course, all future profits from Markapro would be lost. Again, this solution may sole the company(s short-term budget crisisD but could result in the loss of future profits for Pharma.or in the long-run. #. Chile it is not uncommon for companies to sacrifice long-term profits for short-term gains, it may not be in the best interest of the company(s shareholders. In the case of Pharma.or, the .$! is primarily concerned 'ith *maximizing shareholder 'ealth+ in the immediate future (third /uarter only), but not in the long-term. ?ecause this executie(s incentie pay and een employment may be based on his ability to meet short-term targets, he may not be acting in the best interest of the shareholders in the long-run. Mohnson definitely faces an ethical dilemma. It is not unethical on Mohnson(s part to 'ant to please his ne' boss, nor is it unethical that Mohnson 'ants to make a good impression on his "-I first days at his ne' )obD ho'eer, Mohnson must still act 'ithin the ethical standards re/uired by his profession. &aking illegal and:or unethical action by capitalizing 5L7 to satisfy the demands of his ne' superisor, Mames .lark, is unacceptable. Although not strictly unethical, I 'ould recommend that Mohnson not agree to slo' do'n the 5L7 efforts on Fyricon or sell off the rights to %arkapro. 4ach of these appears to sacrifice the oerall economic interests of Pharma.or for short-run gain. Mohnson should argue against doing this but not resign if .lark insists that these actions be taken. If, ho'eer, .lark asks Mohnson to capitalize 5L7, he should raise this issue 'ith the chair of the Audit .ommittee after informing .lark that he is doing so. If the .$! still insists on Mohnson capitalizing 5L7, he should resign rather than engage in unethical behaior. "-"9 1-2- (19;29 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2 ". &he possible motiations for the snack foods diision 'anting to take end-of-year actions include6 (a) %anagement incenties. Gourmet $oods may hae a diision bonus scheme based on one-year reported diision earnings. 4fforts to front-end reenue into the current year or transfer costs into the next year can increase this bonus. (b) Promotion opportunities and )ob security. &op management of Gourmet $oods likely 'ill ie' those diision managers that delier high reported earnings gro'th rates as being the best prospects for promotion. 7iision managers 'ho delier *un'elcome surprises+ may be ie'ed as less capable. (c) 5etain diision autonomy. If top management of Gourmet $oods adopts a *management by exception+ approach, diisions that report sharp reductions in their earnings gro'th rates may attract a sizable increase in top management superision. #. &he *8tandards of 4thical .onduct . . . + re/uire management accountants to Perform professional duties in accordance 'ith releant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ectiely. 8eeral of the *end-of-year actions+ clearly are in conflict 'ith these re/uirements and should be ie'ed as unacceptable by &aylor. (b) &he fiscal year-end should be closed on midnight of 7ecember 1". *4xtending+ the close falsely reports next year(s sales as this year(s sales. (c) Altering shipping dates is falsification of the accounting reports. (f) Adertisements run in 7ecember should be charged to the current year. &he adertising agency is facilitating falsification of the accounting records. &he other *end-of-year actions+ occur in many organizations and fall into the *gray+ to *acceptable+ area. Go'eer, much depends on the circumstances surrounding each one, such as the follo'ing6 (a) If the independent contractor does not do maintenance 'ork in 7ecember, there is no transaction regarding maintenance to record. &he responsibility for ensuring that packaging e/uipment is 'ell maintained is that of the plant manager. &he diision controller probably can do little more than obsere the absence of a 7ecember maintenance charge. (d) In many organizations, sales are heaily concentrated in the final 'eeks of the fiscal year-end. If the double bonus is approed by the diision marketing manager, the diision controller can do little more than obsere the extra bonus paid in 7ecember. (e) If &B spots are reduced in 7ecember, the adertising cost in 7ecember 'ill be reduced. &here is no record falsification here. (g) %uch depends on the means of *persuading+ carriers to accept the merchandise. $or example, if an under-the-table payment is inoled, or if carriers are pressured to accept merchandise, it is clearly unethical. If, ho'eer, the carrier receies no extra "-"" consideration and 'illingly agrees to accept the assignment because it sees potential sales opportunities in 7ecember, the transaction appears ethical. 4ach of the (a), (d), (e), and (g) *end-of-year actions+ may 'ell disadantage Gourmet $oods in the long run. $or example, lack of routine maintenance may lead to subse/uent e/uipment failure. &he diisional controller is 'ell adised to raise such issues in meetings 'ith the diision president. Go'eer, if Gourmet $oods has a rigid set of line:staff distinctions, the diision president is the one 'ho bears primary responsibility for )ustifying diision actions to senior corporate officers. 1. If &aylor beliees that 5yan 'ants her to engage in unethical behaior, she should first directly raise her concerns 'ith 5yan. If 5yan is un'illing to change his re/uest, &aylor should discuss her concerns 'ith the .orporate .ontroller of Gourmet $oods. 8he could also initiate a confidential discussion 'ith an I%A 4thics .ounselor, other impartial adiser, or her o'n attorney. &aylor also may 'ell ask for a transfer from the snack foods diision if she perceies 5yan is un'illing to listen to pressure brought by the .orporate .ontroller, .$!, or een President of Gourmet $oods. In the extreme, she may 'ant to resign if the corporate culture of Gourmet $oods is to re'ard diision managers 'ho take *end-of-year actions+ that &aylor ie's as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) that caused ?etty Binson, an accountant at Corld.om to be indicted for falsifying Corld.om(s books and misleading inestors. "-"# 1-30 (19 min.) Pro%ess#onal e"h#cs and end-o%-1ear ac"#ons2 ". &he possible motiations for .ontroller, &odd Allen to modify the diision(s year-end earnings are6 (i) Mob security and promotion. &he company(s .$! 'ill likely re'ard him for meeting the company(s performance expectations. Alternately, the Allen may be penalized, perhaps een by losing his )ob if the performance expectations are not met. (ii) %anagement incenties. Allen(s bonus may be based on the diision(s ability to meet certain profit targets. If the .onsumer Products diision has already met its profit target for the year, the .ontroller may personally benefit if ne' printing e/uipment is sold off and replaced 'ith the discarded e/uipment that no longer meets current safety standards, or if operating income is manipulated by /uestionable reenue and:or expense recognition. #. &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith releant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ectiely. 7isclose all releant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations. 8eeral of the *year-end+ actions are clearly are in conflict 'ith the statement(s principles and re/uired standards and should be ie'ed as unacceptable. (c) 8ubscription reenue receied in 7ecember in adance for magazines that 'ill be sent out in Manuary is a liability. 8ho'ing it as reenue falsely reports next year(s reenue as this year(s reenue. (d) 5eersing the diision(s Allo'ance for ?ad 7ebt 4xpense 'ould iolate Generally Accepted Accounting Principles unless the bad debt allo'ance is currently oerstated. 5ecording this transaction 'ould result in an oerstatement of income and could potentially mislead inestors. (e) ?ooking adertising reenues that relate to Manuary in 7ecember falsely reports next year(s reenue as this year(s reenue. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+ area. %uch depends on the circumstances surrounding each one, ho'eer, such as the follo'ing6 (a) Cancelling two of the diision#s least profitable maga$ines, resulting in the layoff of twenty-fie employees. Chile employee layoffs may be necessary for the business to surie, the layoff decision could result in economic hardship for those employees 'ho lose their )obs, as 'ell as result in employee morale problems for the rest of the diision. %ost companies 'ould prefer to aoid causing hardship for their existing employees due to layoffs unless absolutely necessary for the surial of the business as a 'hole. (b) Selling the new printing e%uipment that was purchased in &anuary and replacing it with "-"1 discarded e%uipment from one of the company#s other diisions. The preiously discarded e%uipment no longer meets current safety standards. Again, 'hile this method may result in a short-term solution for the .ontroller and the Production %anager personally, this decision may actually harm the corporation financially as a 'hole, not to mention the potential resulting in)uries to production 'orkers from hazardous e/uipment. &his method 'ould be also be ethically /uestionable and 'ould likely iolate the I%A(s ethical standards of integrity and credibility. (f) Switching from declining balance to straight line depreciation to reduce depreciation e'pense in the current year. %any companies s'itch their depreciation policy from one method to another. 7eacon Publishing could argue that straight-line depreciation better represents the decrease in the economic alue of the asset compared to the declining balance method. 8traight-line depreciation may also be more in line 'ith 'hat its competitors do. If, ho'eer, the company changes to straight-line depreciation 'ith the sole purpose of reducing expenses to meet its profit goals, such behaior 'ould be unacceptable. &he 8tandards of 4thical ?ehaior re/uire management accountants to communicate information fairly and ob)ectiely and to carry out duties ethically. 1. Allen should directly raise his concerns first 'ith the .$!, especially if the pressure from the .$! is so great that the only course of action on the part of the controller is to other'ise behae unethically. If the .$! refuses to change his direction, then the controller should raise these issues 'ith the .4!, and next to the Audit .ommittee and the ?oard of 7irectors, after informing the .$! that he is doing so. &he .ontroller could also initiate a confidential discussion 'ith an I%A 4thics .ounselor, other impartial adiser, or his:her o'n attorney. In the extreme, the .ontroller may 'ant to resign if the corporate culture of 7eacon Publishing is to re'ard executies 'ho take year-end actions that the .ontroller ie's as unethical and possibly illegal. It 'as precisely actions along the lines of (c), (d) and (e) that caused ?etty Binson, an accountant at Corld.om, to be indicted for falsifying Corld.om(s books and misleading inestors. "-"2 1-31 (29 min.) Glo(al co!an10 e"h#cal challen$es2 ". &he oerarching principles of the I%A 8tatement of 4thical Professional Practice are Gonesty, $airness, !b)ectiity and 5esponsibility. &he statement(s corresponding *8tandards for 4thical .onductK+ re/uire management accountants to Perform professional duties in accordance 'ith releant la's, regulations, and technical standards. 5efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. .ommunicate information fairly and ob)ectiely. 7isclose all releant information that could reasonably be expected to influence an intended user(s understanding of the reports, analyses, or recommendations. 8eeral of the suggestions made by Gamsen(s staff are clearly in conflict 'ith the statement(s principles and re/uired standards and should be ie'ed as unacceptable. c. Pressure current customers to take early deliery of goods before the end of the year so that more reenue can be reported on this year#s financial statements. &his tactic, commonly kno'n as channel stuffing, merely results in shifting future period reenues into the current period. &he oerstatement of reenue in the current period may mislead inestor(s to beliee that the company(s financial 'ell being is better than the actual results achieed. &his practice 'ould iolate the I%A(s standards of credibility and integrity. .hannel stuffing is fre/uently considered a fraudulent practice. e2 (ecord the e'ecutie year-end bonus compensation for the current year in the ne't year when it is paid until after the )ecember fiscal year-end. Generally Accepted Accounting Principles re/uires expenses to be recorded (accrued) 'hen incurred, not 'hen paid (cash basis accounting). &herefore, failure to record the executies( year- end bonus 'ould iolate the I%A(s standards of credibility and integrity. %2 (ecogni$e sales reenues on orders receied, but not shipped as of the end of the year. Generally Accepted Accounting Principles re/uires income to be recorded (accrued) 'hen the four criteria of reenue recognition hae been met6 12 &he company has completed a significant portion of the production and sales effort. 22 &he amount of reenue can by ob)ectiely measured. 32 &he ma)or portion of the costs has been incurred, and the remaining costs can be reasonably estimated. 42 &he eentual collection of the cash is reasonably assured. ?ecause criteria " and 1 hae not been met at the time the order is placed the reenue should not be recognized until after year-end. &herefore, recording next year(s reenue in the current year 'ould be a iolation of Generally Accepted Accounting Principles and 'ould be falsifying reenue. &his 'ould be a iolation of the I%A(s standards of credibility and integrity and may be considered fraudulent. &he other *year-end+ actions occur in many organizations and fall into the *gray+ to *acceptable+ "-"3 area. %uch depends on the circumstances surrounding each one, ho'eer, such as the follo'ing6 a2 Stop all transatlantic shipping efforts. The start-up costs for the new operations are hurting current profit margins. Chile this method may result in better short-term financial results for ?redahl, it may do harm to the long-term financial condition of the corporation as a 'hole. (2 Make deep cuts in pricing through the end of the year to generate additional reenue. Again, this is only a short-term tactic to improe this year(s financial results. Inestors may be content in the short-run, but in the long run the ne' shipping company 'ill see reduced margins from these actions. d. Sell-off distribution e%uipment prior to year-end. The sale would result in one-time gains that could offset the company#s lagging profits. The owned e%uipment could be replaced with leased e%uipment at a lower cost in the current year. Chile this course of action does not necessarily iolate the I%A(s code of ethical standards, it may be only a short-term tactic to improe this year(s financial results. Gamsen 'ill need to 'eigh his options long-term to make the most cost effectie decision for his company. $2 *stablish corporate head%uarters in !reland before the end of the year, lowering the company#s corporate ta' rate from +,- to .+./-. Gamsen may hae other legitimate reasons for relocating his company to Ireland, but doing so only to reduce his tax liability 'ould likely be considered an easion of taxes in the company(s home country. Gamsen should seek the adice of skilled consultants in the area of international tax before making any such moe. &he company could face large fines and een criminal charges for eading corporate income taxes of the home country. 2. It is possible that any of the *year-end+ actions that fall into the *gray+ area may be good for inestors, depending on the credible eidence 'hich supports the management decision. $or example, replacing o'ned e/uipment 'ith leased e/uipment may result in both short-term gains for the company and long-term cost reduction. If so, this decision 'ould be in the best interest of the inestors. If the decision only results in short-term gains, but higher costs in the long-run, then the decision may not be in the best long-term interest of the company(s inestors and should not be implemented solely to prop up short-term earnings. &hose decisions that clearly iolate the I%A code of ethical standards (c, e, and f) 'ould neer be in the best interest of the inestor. &hese options 'ould result in misleading financial statements and could result in the demise of the company or een in criminal charges, as 'as the case 'ith companies such as 4nron and Corld.om. If Gamsen asks the management accountant to take any of the actions that are clearly unethical, he should raise this issue 'ith the chair of the Audit .ommittee after informing Gamsen that he is doing so. If Gamsen still insists on the management accountant taking these actions, he should resign rather than engage in unethical behaior. "-"E