assignment 1.docx

1、assignment 1The Stamford International Inc is having trouble reaching its expected earning goals for the 1st quarter. Based on the senior managements discussion, $0.52per share should be the figure that best reflects the companys operating results for the current reporting period. This figure is com

2、puted upon the preliminary EPS, which is $0.47, plus deferred maintenance cost and spring relocation cost, which amounts to $0.05 in total. As these expenses were incurred last year , they should not be deferred and charged against this year s income, instead, they should be added back to the 1st qu

3、arters earnings to reflect the true financial position of the company. Stamfords management will not reveal this figure to the public for interim reporting purpose because it is still below markets expectation and investors will react negatively to it. To create a more favorable earnings picture, to

4、p managements are seeking alternatives to manage earnings through making various adjustments within the scope of GAAP. In this case, a number of controversial accounting issues had created ample opportunities for management to inflate earnings.Table-1 presents possible solutions for each situation u

5、nder earnings management. After making the above adjustments, the company will report a much more favorable EPS , which is $0.63 ,to the public of (see Table-2) however, management may feel pressure in signing the 1st quarter s Sarbanes Oxley certification for several reasons. Firstly. the misstatem

6、ent of earnings is likely to exceed 5% of income, thus will have a material effect on the financial statements. Management worry that this materiality issue will address SECs concern and subject to substantial punishment .Secondly, the internal auditors report has detected several questionable accou

7、nting practices of Technological Product Division(Table -3 summarized the reasons ). Once becoming aware of such facts , external auditors will suspect that the companys internal control to be inadequate and reverse their opinion over the companys financial reporting if the evidence that they collec

8、t turn out to be unsatisfactory, Under GAAP, management has discretions to choose different accounting methods and use accruals ,deferrals and estimates to manipulate reported earnings . For example, TDD s manager has the flexibility to defer inventory write-off costs to this year as a way to inflat

9、e earnings of last year.1. The division managers are self interested. As a way to maximize their own compensation, they intentionally abused accounting rules and encouraged questionable practices to portray a favorable financial picture of the department .For example, the division controller has arb

10、itrarily changed the accounting rules to classify expensed tools as expenditures without notifying senior management.2. The company does not have strong internal control and corporate governance over individual department. They are not effective to detect managers unintentional measurement errors or

11、 deter their intentional fraud.Table- 1Adjustments to EPSReported EPS$0.47Deferred Maintenance 0.02Heavy Maintenance 0.02Springs Relocations 0.03Other Overseas Dividends 0.10Restructuring Reversal 0.02Adjusted EPS (earnings management)$0.63Table- 2Accounting issuesEffects on preliminary EPSProposed

12、solutions under earnings managementDeferred Maintenance+$0.02Capitalize and defer the cost to subsequent periodHeavy Maintenance+$0.02Capitalize and defer the cost to subsequent period if the maintenance service improve the quality of serviceSprings Relocation+$0.03Capitalize and defer the cost to s

13、ubsequent periodBrazilian DividendsRecorded as other incomeOther Overseas Dividends+$0.10Recorded as other income if they can be reasonable estimatedItalian Subsidiary Write-DownRecorded as cost of goods sold if the amounts are insignificant; recorded at operating costs if the amounts are insignific

14、antItalian SubsidiarLawsuitDisclosed in the footnotes Major Ads CampaignExpensed the cost in the current periodForeign Exchange GainRecorded as other comprehensive incomeRestructuring Reversal+$0.02Record the reversal as liability account,charge the restructuring costs against the reversal and add t

15、he remaining reversal account into net incomeTable -2 ddiscretion to use accruals choose among different accounting methods to recognize revenues,record depreciation exepense, defer tax payments , firms have discretion in choosing accounting principle s and must make estimated in applying those acco

16、unting principles in most cases. Firms should disclose sufficient information in the financial statements and notes to inform users of these choices. Measuring the economic effects of a firm activity often requires judgement, estimation and subjectivity. The increase in the degree of subjectivity al

17、so increases the potential for firms to report accounting information that include unintentional measurement error or intentional bias to portray the firm in a light most favorable to the firm or its manager.the reason why is largely affected by division managers personal intergrity.trying to create

18、 a favorable picture of their departments growth and maximize their own compensation, the managers are induced to aggressively abuse accounting rules s and encourage questionable earning management practices.To create optimal manager compensation payments, manipulate their compensationTo influence s

19、hort term stock price performance to meet the security analyst s profit forecast which will enhance the success in the acquisition negotiations. 1.Restructuring reserveFirm record a restructuring liability on the balance sheet and the associated restructuring as an expense on the income statement wh

20、en firms have committed to the restructuring plan and the restructuring costs meet the definition of liability. Earnings management permits firms to remain the reserve in the accounts and absorb losses as they occur. Stamford charges actual losses against the reserve account, instead of against net

21、income. When the contingency is solved, the remaining amount in the reserve account will be reserved and added into net income.2.Foreign exchange gainShould be included as owners equity as part of other comprehensive income and included as earnings only when firms receive cash from foreign units and

22、 covert foreign currency into US dollars. however, earning management create opportunities for firms to realize gains and reported as income by selling the securities at a gain3. Deferred maintenanceMaintainance and repair costs should be expensed immediately as incurred. Earning management provides

23、 the opportunity for managers to classify maintenance costs as capital expenditures, therefore 4. Heavy maintenanceClassify as capital expenditures and defer extra costs to later period.5. major advertising campaign GAAP requires immediate expensing of these costs as incurred in the first quarter. R

24、eported as part of SG&A expense on the income statement 6. Brazilian dividends Dividend income is reported as earnings on the income statement when received or deem to be receivable.7.other overseas dividendsReported as earnings on the income statement8.Italian subsidiary write- downReduce the asset

25、 account of inventory, report the write down of inventory as an expense account or cost of goods sold account in the income statement.Management judgment in the subsequent expenditures area creates amply opportunities for earnings management. The capitalizing vs the expense choice has immediate effe

26、ct s on the income statement. One way to increase earnings is to classify routine maintenance and repair costs as capital expenditures. thus, investors must rely on managements integrity and auditors monitoring as protection against self interested managers manipulations earnings through biased appl

27、ication of the judgment necessary in many settings. strong governance and auditor reporting of internal reporting weakness assist the accounting quality.A portion of an estimated annual expenditure that might be expensed for the entire annual period may be accrued or deferred at the end of the inter

28、im period as management allocates the estimated annual expense between periods on the basis that reflects time , sales volumn, or production activity.Im having a tough time adjusting to college. I miss my family, my friends and my home. You are just having a bout of homesick, it is normal.Really? Bu

29、t I dont think everyone else is feeling the same way.They just wouldnt admit it. Being homesick is part of almost everyones college experience.Maybe u r right.ive never been away from home for so long. I miss the way my dog would greet me every day after school.I know u r missing the comforts of you

30、r familiar routine. But u need to start ur own life now. Ive trying very hard to deal with these feelings. But all of my efforts have been futile.Well, dont be too harsh on urself for experiencing something that is completely normal. Anyway, do u have any idea on how I should get out of this funk?It

31、 might help to start by thinking about what in particular you are missing. I found a mice restaurant that has ur hometowns local specialty. Would u like to go sometime? Its only five minutes walk away from school.Ive been missing the smells of home cooking ever since I came here. I was even thinking

32、 if I should ask my mom to send me a package of home made waffles.Perhaps u can find some dished that approximate what u r missing. Lets try the restraurant first.I wont miss it for world.But now, I feel overwhelmed by the current workload. I have so many exams, reading lists and other responsibilities.The shiny newness of colleage has disappear by now. I no long enjoy my privacy because I have roommate. I hate the idea of ha