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Question 1. (15 marks)
You are the junior management accountant working for Electronics Outlet (EO) which assembles hi-fi components. EO carries a significant amount of finished goods inventory and use the perpetual inventory system. The electronic assembly industry is very competitive and the company has reported losses for the past two years. The Chief Financial Officer (CFO) is anxious that this year the company may default on the terms of a major bank loan which requires the company to maintain a minimum current ratio relationship (current assets/current liabilities).
The yearend inventory of finished goods revealed that, due to problems with suppliers, the last two assembly runs has produced hi-fi products of lower technical specifications and can be sold only for a much smaller price that normal. You have estimated that the sale value per hi-fi is $60 less than cost of producing them and a significant write down in the value of closing stock is required.
The CFO is not prepared to make any adjustment to stock prior to the year end as the business needs the bank loan to continue operations in the short term. He is confident that business will improve in the coming year and by the end of that year a stock adjustment could be made without detrimentally appearing to affect the net profit result.
Use the Stakeholder Analysis framework, described in Chapter One, to briefly analyse the above situation and determine the ethical issue and make a recommendation to your manager.
Question 2. (25 marks)
Great Sports makes athletic footwear. Processing of production orders is as follows:
At the end of each week, the production planning department prepares a master
production schedule (MPS) that lists which shoe styles and quantities are to be produced
during the next week. A production order preparation program accesses the MPS and the
operations list (stored on a permanent disk file) to prepare a production order for each
shoe style that is to be manufactured. Each new production order is added to the open
production order master file stored on disk.
Each day, parts department clerks review the open production orders and the MPS to determine which materials need to be released to production. All materials are bar-coded. Factory workers work individually at specially designed U-shaped work areas equipped with several machines to assist them in completely making a pair of shoes. Factory workers scan the barcodes as they use materials. To operate a machine, the factory workers swipe their ID badge through a reader. This results in the system automatically collecting data identifying who produced each pair of shoes and how much time it took to make them.
Once a pair of shoes is finished, it is placed in a box. The last machine in each work cell prints a bar-code label that the worker affixes to the box. The completed shoes are then sent to the warehouse.
- Describe TEN control procedures that should be included in the system. (5 marks)
- Describe the type of IT system that is most suitable for a company that mass-produces large batches of standard items in anticipation of customer demand. (10 marks)
- Describe the advantages and disadvantages of the IT system described in (b) above. (10 marks)
Question 3. (10 marks)
Some companies have moved to vendor-managed inventory (VMI) systems.
Discuss the potential advantages and disadvantages of this arrangement.
Accounting Assignment Solution
According to Romney et al. (2012, p. 22), ethical decisions have to follow a structured approach like utilisation of the stakeholder analysis framework. The ethical dilemma faced by the junior accountant at Electronics Outlet (EO) is analysed using the following template.
1. Ethical Issue in EO
The ethical dilemma observed in the given situation is that the CFO of EO is asking the junior accountant to deceive about the stock value. By not writing down the inventory on market value which is $60 lower than the production cost, EO’s current ratio will remain favourable and attractive to the bank for maintaining the loan terms. By overvaluing the inventory, the bank would continue to offer the loan, and EO would survive from defaulting as the loan is required for short term operations. However, once the bank received the audited financial statement later, it would lead to an investigation of any fraudulent activity. If proven, it will have an adverse impact on the company’s reputation and credibility. This incident may impact future loan requests and sanctions. Also, the inventory on hand is used to calculate taxes and has a direct impact on the tax paid.
2. Principle Elements of this Ethical Dilemma
a. Parties/ Stakeholders
b. Rights/ Claims
c. Conflict of Interests
d. Responsibilities and Obligations
3. Recommended Options and their Consequences
Option 1: To Oblige for CFO’s Request
The accountant does not write down the inventory as per market value as suggested by the CFO
The CFO is satisfied with the current ratio arrived at that meets the bank’s requirement and happy with the accountant that he listened to his views. However, if the unethical activity is found after submitting the audited financial report, it will lead to the judicial investigation, creating both monetary and intangible losses arising from credit loss and a bad reputation.
Option 2: Does not oblige to Client Request
The accountant rejects the CFO’s suggestion and writes down the stock according to the market value.
The accountant is able to meet his professional obligations, and accounting practices are followed appropriately. However, the CFO is unsatisfied and may terminate him.
Option 3: Discussion with the CFO
The accountant states the ethical issue to the CFO, and they mutually agree to write down the stock value. He also advises the CFO to discuss with the bank about the issues faced by EO.
The accountant is able to meet his professional obligations. However, the CFO may or may be satisfied if he is able to convince the bank and may not be satisfied if the bank turns down his request to reconsider the loan terms.
4. Ethical Activity to Do
The junior management accountant has to refuse the CFO’s suggestion to the unethical activity of not writing down the inventory value as per market value for the sake of maintaining terms to avoid defaulting bank loan as it has adverse implications over the long term if deducted. He/ She has to explain the CEO about the serious consequences of stating overvalue for the inventory and misleading the bank as an unethical activity. He has to ensure that his professional obligations are met rather than satisfying the interests of his/her employer and work responsibility.