Ryan company has a goal that it\'s earnings per share should increase by at leas

Question

Ryan company has a goal that it's earnings per share should increase by at least 3% each year over the past decade. As a result, the market price per share of Ryan's common stock also has increase each year. Last year (2012), Ryan's EPS was $3. This yeat, jowever, is a different story. Because of decreasing sales, preliminary computations at the end of 2013 show that EPS will be only $2.99 per share.
You are the accountant for Ryan. Ryan's controller Jim Nastia has come to you with some suggestions. He says, I've noticed that the decrease in revenues has been primarily related to credit sales. Since we have fewer credit sales, I believe we are justified in reducing bad debts expense from 4% to 2% of bet sales. I also think that because of the decrease sales, we won't use our factory equipment as much, so we can extend it's estimated remaining life from 10 to 15 years for computing our straight line depreciation expense. Based on my calculations, if we make these changes, Ryan's 2013 EPS will be $3.06. This will sure make our shareholders happy not to mention our CEO. you may even get a promotion. what do you think?

Required :

From financial reporting and ethical perspectives, prepare a response to Jim regarding his suggestion.

Explanation / Answer

Suggestion given by Jim Nastia seem to be good. By enhancing estimating life of factory equipment we will charge a lesser amount of depreciation that finally will result in a high EPS, in same manner when we will charge a lower amount of bad debts from profits then EPS will improve from its previous base.

But we should think on following factors also;

First of all when we will decrease the percentage of bad debts then we are going against principle of conservatism. As per this principle we should immediately record all prospective losses. So as per this principle we cannot do this.

As stated in the question, due to fall in the sales factory plant is not being properly used so we can extend it's estimated remaining life. This point is valid and good because this does not violate any principle and also proves to be ethical by showing actual profits.

But when accountant do something in such a manner that directly or indirectly not disclosed to his CEO and he gets some personal benefits then it will not be good / justifiable and ethical as well because disclosure of all relevant methods or recording and required information to his boss is a primary duty.

Finally we can say that taking some steps for improving EPS and making them happy definitely good but it should be under a circle of principles and ethics.

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