s6-4 Ethical Decision Making: A Mini-Case me you work as an accountant in the me
ID: 2564258 • Letter: S
Question
s6-4 Ethical Decision Making: A Mini-Case me you work as an accountant in the merchandising division of a large public company that s and sells athletic clothing. To encourage the merchandising division to earn as much profit makes 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 man- ager'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 salaries and wages 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: 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. repare an income statement for the division using the classifications advised by the manager Using this income statement, calculate the division's gross profit percentage. What reason (other than reporting "more accurately") do you think is motivating the man- ager's advice to you? Do you agree with the manager's statement that "he's not asking you to fake the numbers"? Do you agree with the manager's statement about not having to follow GAAP? How should you respond to the division manager's "friendly advice"? 5 Evaluatina the Results of Merchandising OperationsExplanation / Answer
1. Income Statement per GAAP
Division's Gross Profit Percentage = (Gross Profit / Net sales) * 100
= (40,000 / 90,000) * 100
= 44.44%
2. Income Staement per Manager's Advise
Division's Gross Profit Percentage = (Gross Profit / Net sales) * 100
= (50,000 / 100,000) * 100
= 50%
3.a. The reason that the Variable part of Manager's pay is based on the Division's Gross Profit Percentage. That is why he is trying to change the presentation of the numbers as to earn an extra pie as variable pay. As per GAAP he will be entitled less Variable pay as compared to the Variable pay per Gross profit percentage calculated per manager's advise.
3b. No, although he is not asking to fake the numbers but the presentation is affected due to which the GAAP's are not followed and the Gross profit of the division is inflated, which is not correct.The numbers must be presented fairly while preparing any statement which he is not considering for the sake of his personal interest.
3c. No, that should not be an excuse. Being a larger company we must have to follow the GAAP's and ensure the fair presentation of the numbers per their classifiaction. We must not the change the classifiaction categories of certain expenditures or incomes to show a higher gross profit.
3d. We should polietely tell him that this presentation will lead to contradict the GAAP's and thus we should go ahead with GAAP's presentation even though the Gross Profit percentage is less in that. Also, this is not in favour of the company as in entirety.
Particulars Workings Amount ($) Gross Sales 100,000 Less : Sales Return and Allowances 6,000 : Sales Discounts 4,000 Net Sales 90,000 Less : Cost of Goods Sold 50,000 Gross Profit 40,000 Less : Salaries and Wages 30,000 Net Profit 10,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.