Case 23.2 – An Ethical Dilemma

Scenario:  Beta Computers is experiencing financial difficulties attributed to declining sales of its mainframe computer systems. Several years ago, the company obtained a large loan from Midland State Bank. The covenants of the loan agreement strictly state that if Beta is unable to maintain a current ratio of 3:1, a quick ratio of 1:1, and a return on assets of 12 percent, the bank will exercise its right to liquidate the company’s assets in settlement of the loan. To monitor Beta’s performance, the bank demands quarterly financial statements that have been reviewed by an independent CPA.

Nick Price, Beta’s CEO, has just reviewed the company’s master budget projections for the first two quarters of the current year. What he has learned is disturbing. If sales trends continue, it appears that Beta will be in violation of its loan covenants by the end of the second quarter. If these projections are correct, the bank might foreclose on the company’s assets. As a consequence, Beta’s 750 employees will join the ranks of the unemployed.

In February of the current year, Rembrant International contacted Beta to inquire about purchasing a custom-configured mainframe computer system. Not only would the sale generate over a million dollars in revenue, it would put Beta back in compliance with its loan covenants. Unfortunately, Rembrant International is an extremely bad credit risk, and the likelihood of collecting on the sale is slim. Nonetheless, Nick Price approved the sale on February 1, which resulted in the recording of a $1.4 million receivable.

On March 31, Edgar Gamm, CPA, arrived at Beta’s headquarters. In Gamm’s opinion, the $1.4 million receivable from Rembrant International should immediately be written off as uncollectible. Of course, if the account is written off, Beta will be in violation of its loan covenants and the bank will soon foreclose. Gamm told Price that it is his professional duty to prevent any material misstatement of the company’s assets.

Price reminded Gamm that if the account is written off, 750 employees will be out of work, and that Gamm’s accounting firm probably could not collect its fee for this engagement. Price then showed Gamm Beta’s master budget for the third and fourth quarters of the current year. The budget indicated a complete turnaround for the company. Gamm suspected, however, that most of the budget’s estimates were overly optimistic.

Initial Post – As an employee, write an internal memo to your manager addressing the following:

Should Gamm insist that the Rembrant International account be classified as uncollectible? Should the optimistic third and fourth quarter master budget projections influence his decision? What would you do if you were in his position? Defend your actions.

If you were the president of Midland State Bank, what would you do if you discovered that the Rembrant International account constituted a large portion of Beta’s reported liquid assets and sales activity for the quarter? How would you react if Edgar Gamm’s accounting firm had permitted Beta to classify the account as collectible?

1. Which of the following would result in the largest increase in aggregate demand?

• A. A R30 billion tax decrease and a R30 billion open market sale of government securities.
• B. A R30 billion increase in social security payments and a R30 billion open market sale of government securities.
• C. A R30 billion increase in military expenditure and a R30 billion open market purchase of government securities.
• D. A R30 billion tax increase and a R30 billion open market purchase of government securities.
• E. A R30 billion increase in military expenditure and a R30 billion open market sale of government securities

2.Suppose that the economy is operating at full employment. If the government wants to discourage consumption spending and stimulate investment spending, which of the following combinations of monetary and fiscal policy would most likely achieve these goals, assuming that consumption does not depend on the interest rate?

• A. Monetary Policy-decrease money supply and Fiscal Policy-decrease personal income taxes
• B. Monetary Policy- Increase money supply and Fiscal Policy- Increase personal income taxes
• C. Monetary Policy- decrease money supply and Fiscal Policy- Increase personal income taxes
• D. Monetary Policy- decrease money supply and Fiscal Policy-Increase government spending
• E. Monetary Policy- Increase money supply and Fiscal Policy- decrease personal income taxes

3.To counteract a recession, the SARB could:

• A. Raise the required reserve ratio and lower the repo rate.
• B. Buy government securities on the open market and raise the required reserve ratio.
• C. Sell government securities on the open market and raise the repo rate.
• D. Buy government securities on the open market and lower the required reserve ratio.
• E. Buy government securities on the open market and raise the repo rate.

4.Which of the following will lower inflationary expectations?

• A. An increase in consumer and business optimism.
• B. An increase in the money supply.
• C. The SARB announcement that it will steadily raise the repo rate.
• D. The government's announcement that it will increase spending on infrastructure.
• E. An increase in the value of stocks.

5. Which of the following statements describes the effect of the South African Reserve Bank selling government bonds? (i) The money supply decreases and the interest rate increases. (ii) The money supply increases and the interest rate decreases. (iii) There is a decrease in equilibrium output in response to increase in interest rate. (iv) There is an increase in equilibrium output in response to decrease in interest rate.

• A. (ii) and (iv) only.
• B. (i) and (iii) only.
• C. (ii) only.
• D. (i) and (iv) only.
• E. (iv) only.

The Australian economy is "weak", with households weighed down by slow wages growth and higher taxes, the OECD has declared in a report that backs lower interest rates, calls for more government spending and paves the way for unconventional monetary policies. In its six-monthly review of the global economy, the Paris-based think tank has sharply downgraded its expectations for Australia while raising serious concerns about the level of debt being carried by households. The Morrison government this week announced $3.8 billion of infrastructure projects would be pulled forward or given additional funding over the next four years. The decision followed calls from the Reserve Bank of Australia (RBA), which has sliced official interest rates to a record low 0.75 per cent, for a lift in public spending plus productivity-enhancing structural reforms. But economists have warned the new spending will equate to less than 0.1 per cent of gross domestic product (GDP), arguing much more needs to be done to get the economy growing fast enough to bring down the national unemployment rate. The Organisation for Economic Co-operation and Development (OECD), which noted the global economy was now growing at its slowest rate since the global financial crisis, said it expected Australian GDP to expand by 2.3 per cent this year and next, well short of the federal government's forecast. It also expects private consumption, which accounts for about 60 per cent of total economic activity, to barely grow faster than inflation over the next two years. In March, the OECD was expecting unemployment to start edging down. It has now lifted its forecasts, tipping unemployment to average 5.3 per cent in 2020. 3 ECON 1007 Macroeconomics Assignment SP2 2020 "Economic activity has been weak," the OECD said about Australia. "Private consumption spending has been sluggish, weighed down by slow wage growth and an increase in taxes paid by households." While the government has argued its recent tax cuts will help households offset slow wages growth, the OECD and other organisations such as the RBA have noted overall tax levels are increasing as the budget returns to surplus. Research this week from National Australia Bank found Australian household debt was now at a record high of 202 per cent of annual income. The OECD said high household indebtedness could "exacerbate" any economic shock that hit Australia. It said with the RBA likely to cut interest rates further, which in turn could feed into a lift in house prices, lending standards might have to be tightened to protect households. "High household indebtedness means that the authorities should stand ready to tighten macroprudential policy settings if lower interest rates fuel house price inflation through a sharp pickup in credit," the OECD found. While expecting further rate cuts, the organisation said the Morrison government should "loosen fiscal policy" to help get the economy growing faster. "Fiscal policy is expected to provide little support to economic growth, in accordance with the federal government's commitment to future budget surpluses," it said. "A more expansionary fiscal stance may be warranted given that the economy is growing well below its potential and the relatively low public debt burden. "At the same time, growth-enhancing tax reforms should be prioritised. These include shifting the tax mix away from direct taxes and inefficient taxes like real estate stamp duty to the GST and land taxation." Treasurer Josh Frydenberg said the nation's economic fundamentals remained sound, with the country now in its 29th consecutive year of growth. He said there were "headwinds", particularly due to trade policy tensions that have hit confidence and business investment globally since May, but "the government's focus on productivity-enhancing reform will ensure our economy remains resilient". "The international challenges are a stark reminder of why we must stick to our economic plan which has delivered lower taxes so you can keep more of what you earn, more infrastructure to boost productivity and which will return the budget back to surplus so we can meet the challenges that lie ahead," he said.

Consider the following statement “The Australian economy is "weak", with households weighed down by slow wages growth and higher taxes, the OECD has declared in a report that backs lower interest rates, calls for more government spending…” Use the dynamic AD-AS model to describe a longer run scenario where the government is trying to pursue higher economic growth using higher government spending, but were incorrect in their estimation of the major parameters governing long run full employment equilibrium. In your analysis discuss the implications of an incorrect scenario predicted by the government when effecting their stimulus policy on equilibrium output and (un)employment. Make sure to outline the assumptions you have made to reach your conclusion.

What does the case teach about strategies that enterprises must adapt to in a competitive market?

Here is article:

Vizio and the Market for Flat Panel TVs Operating sophisticated tooling in environments that must be kept absolutely clean, fabrication centers in South Korea, Taiwan, and Japan produce to exacting specifications sheets of glass twice as large as kingsize beds. From there, the glass panels travel to Mexican plants located alongside the U.S. border. There they are cut to size, combined with electronic components shipped in from Asia and the United States, assembled into finished flat panel TVs, and loaded onto trucks bound for retail stores in the United States, where consumers spend over $35 billion a year on flat panel TVs.

The underlying technology for flat panel displays was invented in the United States in the late 1960s by RCA. But after RCA and rivals Westinghouse and Xerox opted not to pursue the technology, the Japanese company Sharp made aggressive investments in flat panel displays. By the early 1990s Sharp was selling the first flat panel screens, but as the Japanese economy plunged into a decade-long recession, investment leadership shifted to South Korean companies such as Samsung. Then the 1997 Asian crisis hit Korea hard, and Taiwanese companies seized leadership. Today, Chinese companies are starting to elbow their way into the flat panel display manufacturing business.

As production for flat panel displays migrates its way around the globe to low-cost locations, there are clear winners and losers. U.S. consumers have benefited from the falling prices of flat panel TVs and are snapping them up. Efficient manufacturers have taken advantage of globally dispersed supply chains to make and sell low-cost, high-quality flat panel TVs. Foremost among these has been the California-based company Vizio, founded by a Taiwanese immigrant. In just six years, sales of Vizio flat panel TVs ballooned from nothing to over $3.1 billion by 2013. In early 2009, the company was the largest provider to the U.S. market with a 21.7 percent share. Vizio, however, has fewer than 500 employees. These focus on final product design, sales, and customer service. Vizio outsources most of its engineering work, all of its manufacturing, and much of its logistics. For each of its models, Vizio assembles a team of supplier partners strung across the globe. Its 42-inch flat panel TV, for example, contains a panel from South Korea, electronic components from China, and processors from the United States, and it is assembled in Mexico. Vizio's managers scour the globe continually for the cheapest manufacturers of flat panel displays and electronic components. They sell most of their TVs to large discount retailers such as Costco and Sam's Club. Good order visibility from retailers, coupled with tight management of global logistics, allows Vizio to turn over its inventory every three weeks, twice as fast as many of its competitors, which allows major cost savings in a business where prices are falling continually. On the other hand, the shift to flat panel TVs has caused pain in certain sectors of the economy, such as those firms that make traditional cathode ray TVs in high-cost locations. In 2006, for example, Japanese electronics manufacturer Sanyo laid off 300 employees at its U.S. factory, and Hitachi closed its TV manufacturing plant in South Carolina, laying off 200 employees. Sony and Hitachi both still make TVs, but they are flat panel TVs assembled in Mexico from components manufactured in Asia.

The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don't look forward to sharing those numbers with shareholders.” The numbers he discussed with himself were fourth quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage. Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!” The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier. Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we'd issue. I think we can produce a profit. Barr: But Claude, our bondholders are not inclined to convert the bonds. Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they'll all convert. We won't have to pay a cent. And, since no cash will be paid, we won't pay taxes either. Would this action by Claude Meyer be possible under International Financial Reporting Standards (IFRS)? Why or why not?

1. Suppose you constructed a 90% confidence interval for the true average GPA of California community college students. If all of the sample data were to be held constant, how would this confidence interval compare to an 80% confidence interval based on the same data?

2. A random sample of 100 students was taken to determine interest in switching to a quarter system instead of semesters. Out of the 100 students, 73 stated that they were interested in switching to a quarter system. Construct a 90% confidence interval for the true proportion of students in favor of switching to a quarter system. Make sure to state whether or not the assumptions were met.

Arctic Gear Inc. manufactures jackets and other cold weather clothing. A popular high end ski parka requires the following:

Direct materials standard                            2 square metres at $13.50 per metre

Direct manufacturing labour standard         1.5 hours at $20.00 per hour

During the third quarter, the company made 1,500 parkas and used 3,150 square metres of fabric costing $36,225. Direct labour totaled 2,100 hours for $47,250.

Required:

a.   Compute the direct materials price and efficiency variances for the quarter.

b.  Compute the direct manufacturing labour rate and efficiency variances for the quarter.

Wright Inc. has forecasted the following quarterly sales amounts for the upcoming year:

Q1 = $748; Q2 = $678; Q3 = $899; Q4 = $789

Wright’s purchases from suppliers in a quarter are equal to 70% of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 17% of sales, and interest and dividends are $62 per quarter. No capital expenditures are planned.

Sales in Q1 of the following year are expected to be 961. What are Wright’s cash disbursements in the fourth quarter? (Round answer to 0 decimal places. Do not round intermediate calculations)