The management of a well-known multinational corporation is infamous for “managi
ID: 429964 • Letter: T
Question
The management of a well-known multinational corporation is infamous for “managing by the numbers.” The CEO and the Board of Directors set the target profits at the beginning of the year for each of the company’s divisions. The CEO and the Board have a policy of not interfering in the management of the divisions as long as they “make the numbers.” Division managers receive a year-end bonus if the targets are met.
Late in the fiscal year, one of the division managers realized that making that year’s profit target was not within reach. One of the ways the manager acted upon this information was to order the division to delay all purchases until the next reporting period. On the last day of the fiscal year, the manager discovered that a large purchase of component parts had been recently purchased on account and delivered, even though the parts were not needed for several months. To avoid recording the expense, the manager directed the accounting department to delay recognition of the delivery until the payable was due in the next reporting period. (Noreen, 2014)
Read the scenario below and respond to the questions.
What is the proper way to record the parts purchase? (Hint: Think through the journal entries and how each of these accounts are affected : Inventory, Cost of Goods Sold, and Accounts Payable.)
What Financial Statements are affected and when?
Does the manager’s directive to delay purchases actually affect the profit of the company for the current reporting period?
Are the manager’s actions ethical? Are they legal? Explain your opinion.
How could company policy have influenced the manager’s behavior?
Explanation / Answer
What is the proper way to record the parts purchase?
Since they are purchasing the inventory on credit, Inventory will be debited and accounts payable will be credit. They are not going to sell the inventory in this accounting period therefore as per matching concept; no entry for cost of goods will be passed.
What Financial Statements are affected and when?
At the time of purchases only balance sheet will be affected. The credit purchase will increase the inventory balance under current assets. Also the amount of accounts payable will increase by the same amount. Cost of goods sold we will recorded as an expense when they sell the inventory to their customers.
Does the manager’s directive to delay purchases actually affect the profit of the company for the current reporting period?
No, this is not going to affect the profits. Profits will be decreased if they sell the inventory lower than its cost. Unsold inventory will be shown in the balance sheet and it will not be entered in the income statement.
Are the manager’s actions ethical? Are they legal? Explain your opinion.
Manager’s actions are neither ethical nor legal. They are not following accounting principles. They are not showing true and fair view of their accounting records. They are recording purchases as expenses and this is going to affect its net profit margin.
How could company policy have influenced the manager’s behavior?
The company is following a policy of management by numbers. This makes the manager’s actions and behaviour stringent. They are just looking at profit numbers. They are not concerned with qualitative factors like customer retention, quality improvement etc. They are using profit margins to measure departmental performance which is not a good practice.
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