Acg320 Discussion Board

From: Mary.Roupp

Date: 4/1/2006 1:35:26 PM

Subject: Re: Unit 2 The Timing and Mechanics of Accounting (DB)

Companies often try to manage earnings by recognizing revenue before it is actually earned acco5rding to GAAP, or by deferring expenses that have been incurred. For example, to meet the targeted earnings for a specific period, a company may capitalize a cost that should be expensed. Read the following scenario and then decide how you would handle this opportunity to manage earnings.

You are a division manager of a large public company. Your bonus is calculated on your division's net income targets that you must meet. This year that target is $1.5 million. You are authorized to sign off on any decision made within your division. You are faced with the following situation:

On November 15, your division of the company ordered $150,000 worth of supplies in anticipation for the seasonal rush. Most of these supplies will be used by year-end. These supplies were delivered on November 30. If you record this expense this year, your net income will be $1.45 million and you will not meet the target, and therefore not receive your bonus of $25,000 that you have worked hard for all year. What would you do and why? (1 to 2 paragraphs)

I would record the expense even though I will not receive my bonus. My reasoning behind this is that it is the ethical thing to do. When a person starts to manipulate expenses for personal gain, that is when the act becomes unethical, illegal and against GAAP principles. If in the past the company has accrued the expenses and recorded only the supplies used, then not only is it ethical but depending on the other expenses and revenue received in December, I could possibly still get my bonus for the year. I tend to err on the side of caution and if there is any question about whether I should do something, I will do the right thing and record it instead of taking the chance of getting caught, causing my company to be audited or even losing my job. The $25k bonus isn't worth losing my job especially if I enjoy where I work and have been there for a while.

Another reason is that if I don't record the expense, then the balance sheet, income statement, and the statement of retained earnings will all be incorrect. The income statement will overstate what the company's net income is by understating the expenses that have been incurred. This in turn will affect the statement of retained earnings by overstating what the company's net retained earnings were. The balance sheet will be affected because the stockholders' equity will be overstated by the addition of the retained earnings and supplies will be overstated as well. Another problem is that if the decrease in supplies isn't recorded, then the company might question why I would order supplies in January since nothing was recorded on the books. They might believe that the supplies were being taken by the employees instead of used by the company.