Balance Sheet and Sales Growth

Balance Sheet and Sales Growth

BUS104 Managerial Accounting 2nd Term 2011 -2012 Assignment 1 (Deadline for submission: 13 February, 2012, 5:30PM) Notes: 1. This assignment carries 2% of your total mark. 2. Copying answers from another student’s work is unethical. 3. If you feel that you need to make certain assumptions about the problem, state these assumptions clearly. Your assumptions will be acceptable if: a) they are reasonable in the context of accounting, b) they are entirely consistent with other information in the problem, and c) they do not oversimplify the problem. 4.

Submit the answer sheet of this assignment. 5. Present your answers clearly and orderly. Problem: Ethics in Business Zara, Inc. , operates a chain of 44 department stores. Two years ago, the board of directors of Zara approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing theses plans, two stores were remodeled as a test. Hannah Young, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores.

While completing the financial reports, Hannah discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses. Required: (1) What are the ethical issues in this case? (2) Identify the parties whose interests were affected by the hidden obsolete inventory. 3) In what ways which the individuals were affected by the untrue and unfair disclosure? (4) In what ways which Zara’s interest was affected? (5) According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for Hannah not to report the inventory as obsolete? Which areas of the IMS’s Statement are violated? (6) What alternative ethical actions could Hannah take in this situation? (7) What is your proposed solution? Answer Sheet Student Name: ___Yu Wai Yin, Rico_________ Section: _____4_________ Student Number: ______1116818____________________ No. |Answer |Score | |(1) |The ethical issues are: | | | |As the question mentioned above, Hannah Young and the management personnel were both entitled to a | | | |variable amount of bonus based on the sales growth and profitability of the two stores used for the | | | |test.

In this situation, they may technically overcast the sales growth and profitability of the two | | | |stores in order to obtain a higher bonus. So, this may involve some ethical issues about dishonest | | | |presentation of financial statement. | | | | | | | | | |(2) |The affected parties are: | | | |Customers and manufacturers. | | | | | |(3) |The ways in which the individuals’ interests are affected are: | | | |For customers, they will have earned a discount on the particular goods in this question.

So, this | | | |untrue and unfair disclosure will cost them more when purchasing these goods. | | | | | | | |For manufacturers, these goods should have been returned to them. So, the manufacturers will face an | | | |inventory loss due to this untrue and unfair disclosure. | | | | | | | | | | | | | |(4) |The ways in which the company’ s interest is affected are: | | | |The company will earn eventually earn an unexpected profit due to this untrue and unfair disclosure.

But| | | |if it is being discovered by the others, this amount of unexpected profit will not be valid and the | | | |company may also be sued as it is an offence of HK laws. | | | | | | | | | | | | | |(5) |The IMA Statement are violated in the following areas: | | | |Credibility is violated.

It is because it requires us to disclose all relevant information that can | | | |influence a user’s understanding of reports and recommendations. In this situation, the information of | | | |the obsolete inventory is not disclosure. So, it affects the financial users’ interest when interpreting| | | |the financial statements. | | | | | | | | | |(6) |Decision options include: | | | |Tell this situation to the higher level management. | | | | | | | | | |(7) |Proposed solution: | | | |I think that it is more ethical to disclose this situation to public and also professionally treat this | | | |situation.

For example, tell the customers and the manufacturers the truth. Then discuss the situation | | | |together and come up with a both-agreed way to deal with it. | | |Comments: | Total: | | | | | | | | | |

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