Accounting Case Study

Mary Beancounter is the new division controller of the snack-foods division of Great Tasting Foods. Great Tasting Foods has reported a minimum 15% growth in annual earnings for each of the past 5 years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the 2016, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Great Tasting Foods this year. One month before the December 31 fiscal year-end of 2016, Beancounter estimates the snack-foods division will report an annual earnings growth of only 8%. John Bossy, the snack-foods division president, is not happy, but he notes that the “end-of-year actions” still need to be taken.

Beancoutner makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:

a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.

b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.

c. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.

d. Giving salespeople a double bonus to exceed December sales targets.

e. Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year.

f. Deferring the current period’s reported advertising costs by having Great Tasting Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date.

g. Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.

Required:

Beancounter is deeply troubled by these potential end-of-year actions. As a management accountant, write a formal business memorandum to the Division President, Mr. Bossy, about Beancounter’s concerns. In the memo, make sure to address each of the suggestions above and indicate whether they are (a) in violation of ethical standards and why, or (b) acceptable and why. Consider the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management” on page 18 of the textbook. Conclude the memo with a final recommendation to the Division President as to what action(s) should be taken by the company.

Make sure the heading of the memo includes your last name, first name (Smith, John) and the course number and meeting time of your class.