Instructions Read the following scenario and address the que

Instructions Read the following scenario and address the questions below in a one to two page essay. Cola Bonanza Corporation Record Keeping Practices The management of the well-known multinational corporation, Cola Bonanza 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. As long as the targets are met, the CEO generally tends to ignore how division managers achieve them, and in fact, rewards division managers with a year-end bonus for meeting the targets. Late in the fiscal year, one division manager realized that making that year\'s profit target was unlikely to happen given the division\'s current expenses. So, the manager asked the accounting department to change the way it records their supplies expense at the end of the year. The manager asked that the cost of the supplies be added to the inventory account. Questions .Which Financial Statements are affected, and when? How does this request benefit the manager? Are the manager\'s actions ethical? Are they legal? Explain your answer. How could company policy have influenced the manager\'s behavior?

Solution

1. The Financial Statements which the company generally prepare include Income Statement, Balance Sheet, Statement of Cash Flows, Statement of Stockholders\' Equity, Statement of Comprehensive Income. In the given scenario, the financial statements which are likely to be effected include, Income Statement, Balance Sheet, Statement of Comprehensive Income.

Income Statement gets effected as the Supplies Expense are being recorded as Inventory. Balance Sheet gets effected because of the irregular increase in Inventory Account. Statement of Comprehensive Income gets effected because of the Net Income figure which we take from the Income Statement.

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2. In the given scenario, the manager requested the accounting department to change the way they record their supplies expense at the end of the year and to add the cost of supplies to the inventory account. If the above change is done, expenses for the period would be decreased, if the expenses for the period reduces, automatically the profit would hike up. Increase in profits would help the manager in taking bonuses which the company give on acheiving the target profits.

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3. The manager\'s actions are not ethical. The management of the company are selected by the shareholders, shareholders are the real owners of the company and the management just run the business. The shareholders have right to receive correct information. In this way, if the management changes the way of accounting in accordance to their own self benefit, it drastically effects the way shareholders analyse the information. Looking at the profits on the face of the financial statements, potential investors may be thinking to invest in the company but they don\'t know that the company in which they\'re investing is purely loss making. This would effect both the shareholders, potential investors and the economy in the whole. Economy is effected because, the money which can be used in productive resources are being used for the less productive resources like this loss making company.

The management\'s actions are not legal. Companies need to follows GAAP in preparing and presentation of their financial statements. The done changes are not as per GAAP, hence they are not even legal.

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4. In the given scenario, the company policy is \"to acheive the target profit which they determine at the beginning of the year\". If this target profit is acheived by the division managers, they would be rewarded with bonuses. Management are greedy enough to change the accounts to earn their bonuses. This specific policy leads to management behavior of maintaing the accounts. If the company CEO looks after how the profits are being earned rather than checking whether the profits are earned or not, the managers\' might be careful on their part on not manipulating the accounts to receive their personal benefits.

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