Todd Parks is the newly appointed CEO of a manufacturing company. He is having a hard time understanding why the reports that he is getting from the accounting department regarding the production costs do not seem to match the financial statements. In a memo, explain the difference between costs reported on financial statements and in his managerial accounting reports.

James Adam has been the CEO in the company for the past 12 years. Before that, Mr. Adam had worked for a large organization for 10 years. He has implemented a number of changes that have earned him a great deal of respect and admiration from both companies' employees and surrounding community Perhaps more than anything else, James is known for establishing progressive human resources practice. He strongly believes that the company's employees are its most important assets and continually searches for ways to increase both employee satisfaction and productivity. He thinks that all employees should try to continually improve their skills and abilities. Therefore, he trains employees and send many of them to courses and conferences. Regarding employee compensation, James firmly believes that employees should be paid according to their contribution to organizational success. Most important James previous experiences in company “XXX”, has guided him as a current CEO. James recall that in his previous company, he implemented a result-based pay system under which employees could earn a bonus from 0 to 10 percent each year, depending on their job performance. Bonuses are typically determined by the company's HR committee during November and are granted to employees on January first of each year. In addition to granting employees several rewards according a scheme that was designed recently in the company. Further the company also began giving cost of living raises. James was opposed to this idea originally but had to agree to it. As a result, few rumors started to appear in relation to the fairness of the performance-based raise. XXX company has always been proud of its performance management system. As a policy, at the begging of each year, every employee and his/her supervisor develop goals for the employee to achieve over the following 12 months, with a follow – up meeting after six months to assess progress and take remedial action. Rumors were suggesting that the policy is not being implemented fairly. Some supervisors agree with their subordinated on very simple goals which requires minimal efforts were as other supervisors formulated complicated goals. Some of the staff even said that they do not see the results of their evaluation before the following January. One December, another competitor company in town. An alarming observation was made by one of the supervisors; XXX lost four of its employees to the new company in the first four months of its operation. Further James started to hear for the first-time rumors about complains about employee's salaries. Several staff complained that other employees in similar positions in other companies in the market are receiving better compensation than their compensation. To his surprise, he started to hear complaints from all departments. An exception was the dealers group department. James has been always well respected. People admired him, many employees did not raise an official complains or made formal demands for raise but rumors about complaints were hard not to be noticed by an experienced boss who pays attention to human resources issues. James was determined to be proactive and to take measures before the company loses its competitive position. Upon enquiring from the HR committee, he was informed that everything is fine. Actually, one member of the committee said that that "our dealers are the happiest in the market, they are being paid an average of $ 200 a month more than dealers in the other companies". James was not comfortable to this idea. He also was curious of whether the new HR committee leader has influenced the committee to introduce changes in the company HR practices that were not in line with his vision. He was thinking of restructuring the committee and may be establishing a new HR structure. In the middle of his thinking another issue was brought to him. The HR committee of the company met to determine what should be done regarding the dealer’s bonuses. They knew that none of the dealers had been told how much their bonus would be but that they were all expecting both performance award and cost of living raise. They also realized that, if other employees learned that the dealers were being overpaid in relation to market, conflict could develop, and morale might suffer. They knew that it was costing the Company over $ 30,000 extra to pay the dealers. Finally, they knew that as a group the XXX’s dealers were highly competent, and they did not want to lose any of them.

1. How do think James and the HR committee solved the problem of discrepancy between salaries of dealers and salaries of other employees in other departments in XXX.

James Adam has been the CEO in the company for the past 12 years. Before that, Mr. Adam had worked for a large organization for 10 years. He has implemented a number of changes that have earned him a great deal of respect and admiration from both companies' employees and surrounding community

Perhaps more than anything else, James is known for establishing progressive human resources practice. He strongly believes that the company's employees are its most important assets and continually searches for ways to increase both employee satisfaction and productivity. He thinks that all employees should try to continually improve their skills and abilities. Therefore, he trains employees and send many of them to courses and conferences. Regarding employee compensation, James firmly believes that employees should be paid according to their contribution to organizational success.

Most important James previous experiences in company “XXX”, has guided him as a current CEO. James recall that in his previous company, he implemented a result-based pay system under which employees could earn a bonus from 0 to 10 percent each year, depending on their job performance. Bonuses are typically determined by the company's HR committee during November and are granted to employees on January first of each year. In addition to granting employees several rewards according a scheme that was designed recently in the company. Further the company also began giving cost of living raises. James was opposed to this idea originally but had to agree to it.

As a result, few rumors started to appear in relation to the fairness of the performance-based raise. XXX company has always been proud of its performance management system. As a policy, at the begging of each year, every employee and his/her supervisor develop goals for the employee to achieve over the following 12 months, with a follow – up meeting after six months to assess progress and take remedial action. Rumors were suggesting that the policy is not being implemented fairly. Some supervisors agree with their subordinated on very simple goals which requires minimal efforts were as other supervisors formulated complicated goals. Some of the staff even said that they do not see the results of their evaluation before the following January.  

One December, another competitor company in town. An alarming observation was made by one of the supervisors; XXX lost four of its employees to the new company in the first four months of its operation. Further James started to hear for the first-time rumors about complains about employee's salaries. Several staff complained that other employees in similar positions in other companies in the market are receiving better compensation than their compensation. To his surprise, he started to hear complaints from all departments. An exception was the dealers group department.

James has been always well respected. People admired him, many employees did not raise an official complains or made formal demands for raise but rumors about complaints were hard not to be noticed by an experienced boss who pays attention to human resources issues.

James was determined to be proactive and to take measures before the company loses its competitive position. Upon enquiring from the HR committee, he was informed that everything is fine. Actually, one member of the committee said that that "our dealers are the happiest in the market, they are being paid an average of $ 200 a month more than dealers in the other companies".

James was not comfortable to this idea. He also was curious of whether the new HR committee leader has influenced the committee to introduce changes in the company HR practices that were not in line with his vision. He was thinking of restructuring the committee and may be establishing a new HR structure. In the middle of his thinking another issue was brought to him.   The HR committee of the company met to determine what should be done regarding the dealer’s bonuses. They knew that none of the dealers had been told how much their bonus would be but that they were all expecting both performance award and cost of living raise. They also realized that, if other employees learned that the dealers were being overpaid in relation to market, conflict could develop, and morale might suffer. They knew that it was costing the Company over $ 30,000 extra to pay the dealers. Finally, they knew that as a group the XXX’s dealers were highly competent, and they did not want to lose any of them.

1. What XXX company can do to clarify the truth in relation to the rumors that employees of similar positions in other companies in the market are receiving better compensations?

James Adam has been the CEO in the company for the past 12 years. Before that, Mr. Adam had worked for a large organization for 10 years. He has implemented a number of changes that have earned him a great deal of respect and admiration from both companies' employees and surrounding community Perhaps more than anything else, James is known for establishing progressive human resources practice. He strongly believes that the company's employees are its most important assets and continually searches for ways to increase both employee satisfaction and productivity. He thinks that all employees should try to continually improve their skills and abilities. Therefore, he trains employees and send many of them to courses and conferences. Regarding employee compensation, James firmly believes that employees should be paid according to their contribution to organizational success. Most important James previous experiences in company “XXX”, has guided him as a current CEO. James recall that in his previous company, he implemented a result-based pay system under which employees could earn a bonus from 0 to 10 percent each year, depending on their job performance. Bonuses are typically determined by the company's HR committee during November and are granted to employees on January first of each year. In addition to granting employees several rewards according a scheme that was designed recently in the company. Further the company also began giving cost of living raises. James was opposed to this idea originally but had to agree to it. As a result, few rumors started to appear in relation to the fairness of the performance-based raise. XXX company has always been proud of its performance management system. As a policy, at the begging of each year, every employee and his/her supervisor develop goals for the employee to achieve over the following 12 months, with a follow – up meeting after six months to assess progress and take remedial action. Rumors were suggesting that the policy is not being implemented fairly. Some supervisors agree with their subordinated on very simple goals which requires minimal efforts were as other supervisors formulated complicated goals. Some of the staff even said that they do not see the results of their evaluation before the following January. One December, another competitor company in town. An alarming observation was made by one of the supervisors; XXX lost four of its employees to the new company in the first four months of its operation. Further James started to hear for the first-time rumors about complains about employee's salaries. Several staff complained that other employees in similar positions in other companies in the market are receiving better compensation than their compensation. To his surprise, he started to hear complaints from all departments. An exception was the dealers group department. James has been always well respected. People admired him, many employees did not raise an official complains or made formal demands for raise but rumors about complaints were hard not to be noticed by an experienced boss who pays attention to human resources issues. James was determined to be proactive and to take measures before the company loses its competitive position. Upon enquiring from the HR committee, he was informed that everything is fine. Actually, one member of the committee said that that "our dealers are the happiest in the market, they are being paid an average of $ 200 a month more than dealers in the other companies". James was not comfortable to this idea. He also was curious of whether the new HR committee leader has influenced the committee to introduce changes in the company HR practices that were not in line with his vision. He was thinking of restructuring the committee and may be establishing a new HR structure. In the middle of his thinking another issue was brought to him. The HR committee of the company met to determine what should be done regarding the dealer’s bonuses. They knew that none of the dealers had been told how much their bonus would be but that they were all expecting both performance award and cost of living raise. They also realized that, if other employees learned that the dealers were being overpaid in relation to market, conflict could develop, and morale might suffer. They knew that it was costing the Company over $ 30,000 extra to pay the dealers. Finally, they knew that as a group the XXX’s dealers were highly competent, and they did not want to lose any of them.

2. XXX company had a performance management policy. Do you think it is working? What are the ethical issues that need to be considered in the implementation of that policy?

Ng Company (whose CEO is Sidhuey) issued a bond with face value of $800,000 that will be matured in 8 years at 5% coupon rate. (You may use PV and PV of an Ordinary Annuity tables in the text book.) Required: 1. Prepare journal entries for the issue of the bond when market rate is 6%. 2. Prepare journal entries for the issue of the bond when market rate is 4% 3. Using the effective interest method, prepare journal entries for the interest payment and bond amortization for the end of year 1 and 2. (Market rate is 6%.)

You are in a meeting with Andrea Schwager, the new CEO of your company, discussing property, plant, and equipment, when she asks the following: “The accountants are telling me that, if we sell a piece of equipment for an amount in excess of its carrying amount on our statement of financial position, then we record a ‘gain,' which increases net income. If it increases net income, then why don't we call it a ‘revenue'? Wouldn't this be more understandable for financial statement users?”

Answer Andrea Schwager's questions.

You are a CEO. Your company lobbies for subsidies from the government. You are about to finalize your financial reports for the year, and still have some (discretionary) accounting choices to make. Your earnings before interest and taxes are currently (before you make those final discretionary accounting choices) at $100,000. What incentives do you have for making your final discretionary accounting choices, given your bonus plan and the fact that your company lobbies for subsidies from the government. Discuss

Envision yourself as the CEO/President of an organization with full responsibility to the company, management, shareholders, creditors, regulators, and the general public. Develop a philosophy regarding internal controls for the organization. The polar extremes are 1) “Keep employees/management away from temptation”, whereby the internal controls are very well-defined, or 2) employees/management will follow the good judgment of their leader, whereby you set a good example and trust is the theme until employees do something to betray that trust. As you develop this philosophy, provide 10 examples (from issues in our chapters, fraud events in the news, to justify your philosophy.

Rusty Williams, the owner and CEO of The Rusty Bicycle Company, a small manufacturer and distributer of recreational bikes, has dejectedly watched sales of his company’s flagship bike, the WindRunner, decline precipitously over the past 7 years. Believing that the trend is irreversible, Rusty has taken the drastic step of shutting down the operation of his firm in an effort to reduce costs while he tries to figure out how to rescue the firm he has spent the bulk of his life building.

Rusty asks his brother John, the head design engineer at his firm to design and build a prototype of a new bicycle that might be able to save the company. Rusty tells John to forget about conventional bicycle design and to “think big” and come up with something truly revolutionary.

After about 6 weeks of intense work, John comes back to Rusty with a proposal for the “WindRunner 2.0”, a bicycle unlike anything else on the market today. John believes that the specialty nature of the new bicycle suggests that, while unit sales volume may be relatively low, the bicycle should command a premium sales price. Specifically, he thinks that customers would be willing to pay upwards of $845 per bike.

Rusty, intrigued by the new design, hires a market research consultant, Sandy Frazier, to study the potential demand for the WindRunner 2.0. As projecting demand for a completely new product is notoriously difficult, she limits her prediction to a 5 year horizon. Sandy gives the following forecast to Rusty in exchange for her customary fee of $45,000.

Rusty is optimistic that the expected sales revenue will be enough to save his company. Deciding to move forward on the evaluation of this project, he asks John what new manufacturing capacity will be needed to begin production. John thinks that he could reconfigure the firm’s current manufacturing facility to produce the new model bicycle, although the current production machinery, purchased over 20 years ago, is woefully inadequate. He estimates that the necessary new equipment could be purchased for $2.5 million and that the whole manufacturing process will incur fixed operating costs of $3 million per year. Additionally, he estimates the variable costs of production to run $260 per bike produced.

John further thinks that the existing production equipment, which will no longer be needed, could be sold for $400,000. The existing equipment was classified for tax purposes under the 15 year MACRS category. As a result of a recent exemption given to small businesses, Rusty will not have to use the MACRS depreciation schedules for new capital assets acquired. Instead, the new equipment will be depreciated straight-line to zero over the 5 year planning horizon. John thinks that the new production equipment will be worthless and scrapped at the end of 5 years.

Finally, John tells Rusty that he will need about $300,000 in raw materials (i.e. parts and supplies) for the bicycles to begin production. This expenditure will not be recovered at the end of the project. Rusty, worried about spending so much cash on parts, calls a supplier, Rodney Murdock, to see about short-term credit options. Unfortunately, due to the precarious position Rusty finds his company in, the supplier is unable to offer any credit terms and will insist upon cash on delivery payment for raw materials.

Recently, a federal government economic stimulus measure was enacted. As a result of this effort, small businesses, like Rusty, will have their business income tax rate cut to zero percent for the next 10 years. The intent is to stimulate the formation of new small businesses throughout the country. Since this project is a last ditch effort to save the company, Rusty plans to let the project run for the 5 year forecast horizon. After that, he plans to dissolve the business and retire. Due to the desperation involved in this project, Rusty estimates that a 20% required rate of return is appropriate.

Rusty has asked for your help in addressing the following questions.

Prepare a 5 year forecast of cash flow from assets (CFA) for the WindRunner 2.0 project.

Calculate the Net Present Value (NPV) of the WindRunner 2.0 project.

Since the future of his company rests on the success or failure of this project, Rusty is understandably concerned about risks to his forecasts and expectations for the project. To get a better picture of the risk involved, Rusty again asks you to conduct the following scenario analyses.   

With your previous work being used as the ‘base case’ scenario, estimate the net present value of the project under a pessimistic scenario. Specifically, Rusty wants to consider the project’s NPV if both sales volume and the sales price are 10% below the base case scenario, while variable costs are 10% above the base case scenario estimates. All other variables will remain the same.

Now, to look at the optimistic case, reevaluate the project NPV where sales volume and sales price are 10% above the base case estimates, while variable costs are 10% below base case estimates. Again, all other variables are presumed to remain the same.

Finally, Rusty would like to know what minimum quantity of the WindRunner 2.0 models will have to be sold in order to produce a zero NPV (i.e. the financial breakeven point). That is, he would like to know what level of sales volume would leave him indifferent between undertaking the project versus shelving the project.