Case Study

On January 17, 2008, TJX Companies,

Inc., a leading retailer in the field of clothing

and home fashions which operates

stores domestically and internationally,

announced that the organization had

experienced an unauthorized intrusion

of its computer systems.1 Customer

information, including credit card, debit

card, and driver’s license numbers,

had been compromised. This intrusion

had been discovered in December

of 2006, and it was thought that data

and information as far back as 2003 had

been accessed and/or stolen. At the

time, approximately 45.6 million credit

card numbers had been stolen. In October

of 2007, the number rose to 94

million accounts.2 This has become the

largest known credit card theft or unauthorized

intrusion in history.

Because of the lax security systems at

TJX, the hackers had an open doorway to the company’s entire computer system.

In 2005, hackers used a laptop outside

of one of TJX’s stores in Minnesota and

easily cracked the code to enter into the

WiFi network. Once in, the hackers were

able to access customer databases at

the corporate headquarters in Framingham,

Massachusetts. The hackers gained

access to millions of credit card and debit

card numbers, information on refund

transactions, and customer addresses

and phone numbers. The hackers reportedly

used the stolen information to purchase

over $8 million in merchandise.3

TJX used an outdated WEP (wired equivalent

privacy) to secure its networks. In

2001, hackers were able to break the

code of WEPs, which made TJX highly

vulnerable to an intrusion. (Similar data

breaches have occurred within the past

few years at the firms ChoicePoint and

CardSystems Solutions.) In August of

2007, a Ukrainian man, Maksym Yastremskiy,

was arrested in Turkey as a

potential suspect in the TJX case. According

to police officials, Yastremskiy

is “one of the world’s important and

well-known computer pirates.”4 He led

two other men in the scheme.5

Even though the intrusion was discovered

in December of 2006, the company

did not publicize it until a month later.

Consumers felt that they should have

been notified of the breach once it was

discovered. However, TJX complied with

law enforcement and kept the information

confidential until it was told it could

notify the public. Retail companies such

as TJX that use credit card processing

are required to comply with the Payment

Card Industry Data Security Standard

(PCI DSS). The PCI DSS is a set of requirements

with the purpose of maximizing

the security of credit and debit card

transactions. A majority of firms have not

complied with this standard, as was the

case with TJX Companies.

A number of stakeholders were involved

in this break-in: consumers, who were put

at great risk; banks; TJX Companies (its

shareholders, management, employees,

and other internal parties who did business

with and were invested in the firm);

the credit card company; the law enforcement

and justice systems; the public;

other retail firms; and the media, to name

a few. CEO Carol Meyrowitz took an active

role in informing the public in statements

on the company’s Web sites and

through the media about the company’s

responsibility and obligations to its stakeholders

during and after the investigation.

TJX also contacted various agencies to

help with the investigation. A Web site

and hotline were established to answer

customer questions and concerns.

The intrusion cost TJX approximately

$118 million in after-tax cash charges

and $21 million in future charges. Although

TJX incurred substantial legal,

reimbursement, and improvement

costs, the company’s pre-tax sales

were not negatively affected. Sales during

the second quarter of fiscal year

2008 increased compared to second

quarter sales from fiscal year 2007.6

At the end of 2007, TJX reached a settlement

agreement with six banks and

bankers’ associations in response to a

class action lawsuit against the company.

7 In the spring of 2008, TJX settled

in separate agreements with Visa

($40.9 million with 80% acceptance)

and MasterCard International (a maximum

of $24 million with 90% minimum

acceptance). There was almost full acceptance

of the alternative recovery offers

by eligible MasterCard accounts.8

Note that those issuers who accept the

agreements and terms release and indemnify

TJX” and its acquiring banks on

their claims, the claims of their affiliated

issuers, and those of their sponsored

issuers as MasterCard issuers related

to the intrusion. That includes claims

in putative class actions in federal and

Massachusetts state courts.“9

Affected customers were reimbursed

for costs such as replacing their driver’s

license and other forms of identification

and were offered vouchers at TJX stores

and free monitoring of their credit cards

for three years. Customer discontent was

reportedly expressed after the intrusion;

however, customer loyalty returned,10 as

was evidenced in sales numbers. 4.1 MANAGING CORPORATE SOCIAL RESPONSIBILITY

IN THE MARKETPLACE

“Corporate social responsibility” (CSR) involves an organization’s duty and

obligation to respond to its stakeholders’ and the stockholders’ economic,

legal, ethical, and philanthropic concerns and issues.11 This definition

encompasses both the social concerns of stakeholders and the economic

and corporate interests of corporations and their stockholders. Generally,

society cannot function without the economic, social, and philantropic

benefits that corporations provide. Leaders in corporations who use

a stakeholder approach commit to serving broader goals, in addition to

economic and financial interests, of those whom they serve, including the

public.

Managing corporate social responsibility in the marketplace with multiple

stakeholder interests is not easy. As discussed in Chapter 3, ethics

at the personal and professional levels requires reasoned and principled

thinking, as well as creativity and courage. When ethics and social responsibility

escalate to the corporate level, where companies must make

decisions that affect governments, competitors, communities, stockholders,

suppliers, distributors, the public, and customers (who are also consumers),

moral issues increase in complexity, as the TJX security breach

opening case illustrated. For organizational leaders and professionals, the

moral locus of authority involves not only individual conscience but also

corporate governance and laws, collective values, and consequences that

affect millions of people locally, regionally, and globally.

In the opening case, the TJX executives had to deal not only with

their own customers, but with banks (in a class action suit), credit card

companies, the media, competitors, and a network of suppliers and distributors—

as well as their own reputation. What may have seemed like

a routine technical security problem turned into the largest-known credit

card theft/unauthorized intrusion in history. Had the CEO not stepped in

and became a responsible spokesperson and decision maker for the company,

customers may not have responded in kind.

The basis of corporate social responsibility in the marketplace begins

with a question: What is the philosophical and ethical context from which

corporate social responsibilty and ethical decisions are made? For example,

not everyone is convinced that businesses should be as concerned about

ethics and social responsibility as they are about profits. Many believe

that ethics and social responsibility are important, but not as important as a

corporation’s performance. This classical debate—and seeming dichotomy—

between performance, profitability, and “doing the right thing” continues to

surface not only with regard to corporate social responsibility, but also in political

parties and debates over personal and professional ethics. The roots of

corporate social responsibility extend to the topic of what a “free-market” is

and how corporations should operate in free markets. Stated another way,

does the market sufficiently discipline and weed out inefficient “bad apples”

and wrongdoers, thereby saving corporations the costs of having to support

“soft” ethics programs?

A security breach in a technological world is one of the biggest issues facing companies today. Cyber security is a critical consideration for any business but time and time again businesses are faced with the fear of hacking into their customers' information. Review the TJX case in the textbook. What are the ethical issues impacting the TJX case? What are the long term effects and how might this company win back trust?

Diego Company manufactures one product that is sold for $74 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 45,000 units and sold 40,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	24
Direct labor	$	18
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	585,000
Fixed selling and administrative expense	$	423,000

The company sold 30,000 units in the East region and 10,000 units in the West region. It determined that $190,000 of its fixed selling and administrative expense is traceable to the West region, $140,000 is traceable to the East region, and the remaining $93,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

9. If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales?

10. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 40,000 units? You do not need to perform any calculations to answer this question.

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 40,000 units? You do not need to perform any calculations to answer this question.

12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2?

Exercise 6-21B Complete the accounting cycle using inventory transactions (LO6-2, 6-3, 6-5, 6-6, 6-7)

[The following information applies to the questions displayed below.]

On January 1, Year 1, the general ledger of a company includes the following account balances:

Accounts	Debit			Credit
Cash	$	23,900
Accounts Receivable		41,500
Allowance for Uncollectible Accounts				$	5,100
Inventory		40,000
Land		76,600
Accounts Payable					27,400
Notes Payable (9%, due in 3 years)					40,000
Common Stock					66,000
Retained Earnings					43,500
Totals	$	182,000		$	182,000

The $40,000 beginning balance of inventory consists of 400 units, each costing $100. During January Year 1, the company had the following inventory transactions:

January		3		Purchase 1,900 units for $205,200 on account ($108 each).
January		8		Purchase 2,000 units for $226,000 on account ($113 each).
January		12		Purchase 2,100 units for $247,800 on account ($118 each).
January		15		Return 150 of the units purchased on January 12 because of defects.
January		19		Sell 6,100 units on account for $915,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January		22		Receive $885,000 from customers on accounts receivable.
January		24		Pay $650,000 to inventory suppliers on accounts payable.
January		27		Write off accounts receivable as uncollectible, $3,500.
January		31		Pay cash for salaries during January, $124,000.

The following information is available on January 31, Year 1.

1. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.
2. The company estimates future uncollectible accounts. The company determines $5,000 of accounts receivable on January 31 are past due, and 35% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)
3. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.
4. Accrued income taxes at the end of January are $13,300.

Exercise 6-21B Part 3

a. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.
b. At the end of January, $5,000 of accounts receivable are past due, and the company estimates that 35% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 3% will not be collected.
c. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.
d. Accrued income taxes at the end of January are $13,300.
  

3. Prepare an adjusted trial balance as of January 31, Year 1.

adjusted trial balance

income statement

balance sheet

inventory turnover ratio

gross profit ration is %

A consumer advocacy group received a tip that an air conditioning company has been charging female customers more than male customers. The group's statistical expert decides examine this question at the α=0.10α=0.10 level of significance, by looking at the difference in mean charges between a random sample of female customers and a random sample of male customers. Let μFμF represent the average charges for female customers and μMμM represent the average charges for male customers.(Round your results to three decimal places)

Which would be correct hypotheses for this test?

• H0:μF−μM=0    H1:μF−μM≠0
• H0:μF−μM= 0 :H1:μF−μM<0
• H0:μF−μM=0 H1:μF−μM>0
• HO:μF−μM>0 H1:μF−μM<0

If we are going to test this using a confidence interval, which confidence interval should we construct?

• 80%
• 60%
• 90%
• 95%

A random sample of 33 female customers were charged an average of $915, with a standard deviation of $8. A random sample of 52 male customers were charged an average of $903, with a standard deviation of $17. Construct the confidence interval:

_____________ < μF−μ  < ____________________

Which is the correct result:

• 0 is contained in the confidence interval, so we Do not Reject the Null Hypothesis
• 0 is not contained in the confidence interval, so we Reject the Null Hypothesis
• 0 is not contained in the confidence interval, so we Do not Reject the Null Hypothesis
• 0 is contained in the confidence interval, so we Reject the Null Hypothesis

Which would be the appropriate conclusion?

• There is significant evidence to suggest that the company is charging its female customers more than its male customers.
• There is not significant evidence to suggest that the company is charging its female customers more than its male customers.

A consumer advocacy group received a tip that an air conditioning company has been charging female customers more than male customers. The group's statistical expert decides examine this question at the α=0.10α=0.10 level of significance, by looking at the difference in mean charges between a random sample of female customers and a random sample of male customers. Let μFμF represent the average charges for female customers and μMμM represent the average charges for male customers.(Round your results to three decimal places)

Which would be correct hypotheses for this test?

• H0:μF−μM=0    H1:μF−μM≠0
• H0:μF−μM= 0 :H1:μF−μM<0
• H0:μF−μM=0 H1:μF−μM>0
• HO:μF−μM>0 H1:μF−μM<0

If we are going to test this using a confidence interval, which confidence interval should we construct?

• 80%
• 60%
• 90%
• 95%

A random sample of 33 female customers were charged an average of $915, with a standard deviation of $8. A random sample of 52 male customers were charged an average of $903, with a standard deviation of $17. Construct the confidence interval:

_____________ < μF−μ  < ____________________

Which is the correct result:

• 0 is contained in the confidence interval, so we Do not Reject the Null Hypothesis
• 0 is not contained in the confidence interval, so we Reject the Null Hypothesis
• 0 is not contained in the confidence interval, so we Do not Reject the Null Hypothesis
• 0 is contained in the confidence interval, so we Reject the Null Hypothesis

Which would be the appropriate conclusion?

• There is significant evidence to suggest that the company is charging its female customers more than its male customers.
• There is not significant evidence to suggest that the company is charging its female customers more than its male customers.

• For the company Tesla I need a Company Description - including brief company history and background, current customers
• For marketing class

32) Which of the following statements are TRUE regarding the impact of a dividend issuance compared to a share repurchase on the three financial statements?

a) Both a dividend issuance and a share repurchase will change the company’s Earnings per Share (EPS), since dividends affect earnings and repurchased shares affect the company’s share count.

b) A share repurchase is better for both the company and shareholders because no taxes are paid on repurchased shares, whereas taxes are always paid on dividends issued.

c) Both a share repurchase and a dividend issuance will show up within the Cash Flow from Financing section of the Cash Flow Statement.

d) Both a dividend issuance and a share repurchase will reduce the Equity line item on a company’s Balance Sheet.

e) While a share repurchase reduces the Treasury Stock line item within Equity, a dividend issuance reduces Accumulated Other Comprehensive Income (AOCI), since AOCI represents the company’s saved-up, after-tax earnings.

42) Suppose that you have built a PP&E Schedule.. Which of the following conditions might you check to verify that you are using reasonable assumptions?

a) CapEx as a % of Revenue should almost always be rising over time for a high-growth company like this one.

b) The CapEx annual growth rate should be in-line with historical growth rates, perhaps declining modestly each year as the company grows.

c) Particularly if a company is growing quickly, CapEx as a % of Revenue will often exceed Depreciation as a % of Revenue.

d) In the long-term, Total CapEx should always equal Total Depreciation because the company’s Net PP&E balance should not be changing.

e) CapEx as a % of Revenue should be falling over time because companies have lower re-investment needs as their businesses grow.

47) Suppose that you are analyzing a high-growth software company, such as the one we have been using in these examples. This company, despite its high growth, also has high margins and is generating significant Free Cash Flow.

Which of the following answer choices represent the BEST ways for this company to spend its excess Free Cash Flow if it wants to maximize its valuation?

a) Return capital to investors in the form of dividends or share repurchases, as doing so will likely boost the value of the company’s shares.

b) Substantially increase spending on Working Capital or Capital Expenditures, as both items are essential for software companies to grow.

c) Spend more on sales & marketing to win bigger customers and boost the average customer value.

d) Acquire related companies if the market is highly fragmented and there are target companies with reasonable valuations.

Roberds Tech is a for-profit vocational school. The school bases its budgets on two measures of activity (i.e., cost drivers), namely student and course. The school uses the following data in its budgeting:

	Fixed element per month			Variable element per student			Variable element per course
Revenue	$	0		$	228		$	0
Faculty wages	$	0		$	0		$	2,960
Course supplies	$	0		$	38		$	26
Administrative expenses	$	25,800		$	13		$	38

In March, the school budgeted for 1,770 students and 74 courses. The school's income statement showing the actual results for the month appears below:

Roberds Tech
Income Statement
For the Month Ended March 31
Actual students		1,670
Actual courses		77
Revenue	$	341,340
Expenses:
Faculty wages		207,950
Course supplies		55,590
Administrative expenses		51,562
Total expense		315,102
Net operating income	$	26,238

Required:

Prepare a flexible budget performance report showing both the school's activity variances and revenue and spending variances for March. Label each variance as favorable (F) or unfavorable (U). (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

The following transactions occur for the Wolfpack Shoe Company during the month of June:

1. Provide services to customers for $24,000 and receive cash.

2. Purchase office supplies on account for $14,000.

3. Pay $5,800 in salaries to employees for work performed during the month.

3. Post the transactions to T-accounts. Assume the opening balance in each of the accounts is zero.
  

[The following information applies to the questions displayed below.] O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials $ 29 Direct labor $ 18 Variable manufacturing overhead $ 4 Variable selling and administrative $ 3 Fixed costs per year: Fixed manufacturing overhead $ 560,000 Fixed selling and administrative expenses $ 180,000 During its first year of operations, O’Brien produced 96,000 units and sold 77,000 units. During its second year of operations, it produced 82,000 units and sold 96,000 units. In its third year, O’Brien produced 87,000 units and sold 82,000 units. The selling price of the company’s product is $74 per unit. 3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first): a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3.