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Case Solution Essay

1105 words - 5 pages

Case 1 Solution: Sharon Jacobs is CEO of Henderson Industries Inc, a public company:
The main issue in this case is the disclosure decision, that is whether to disclose about the deferred payments to the shareholders or not. Second issue deals with accounting for sales. It is essential for the company to understand about its performance under the new proposed plan. In this case, the company will be lending money to their customers for purchasing the equipment's. But at the same time, during tough times in construction industry, a large portion of new customers may end up in non-repayment of debt. During tough time in the industry, it will be difficult to get market for the repossesses ...view middle of the document...

This disclosure will take place irrespective of the fact that revenues and profits will be reversed most probably. This will provide for great increase in both revenue and profit which will fool the unsophisticated investors by making them to think that the company is progressing towards profitability and will cause for a slight increase in the stock price substantially. But the negative impact of such impression is that it will be deceptive and also misleading about the company to their investors will totally destruct the company.

If in case Sharon is having a bonus plan that is being tied up with the stock options or stock price, she will prefer to use the traditional accounting method which will increase the stock price in the market. Even though it is not appropriate to do so, Sharon will have personal profit out of such decision. This situation will lead to moral hazard for her. In this case the auditor of the company should refuse to certify the accounts of Henderson as they are not complying with US GAAP if in case the installment sales method is not used.

But Sharon can also except for her desire as persuasive as possible to make an attempt in convincing the company auditors stating that all collections are not risky as they appear and must use an approach which is aggressive. It is essential to realize that these issues are not much clear. Deciding about the collectable deferred revenue would require some subjective judgment and this will not be totally reasonable for arguing to use the traditional accounting treatment to be more appropriate.

Case 2 Solution: CFO of Nildorf Inc., a maker of luxury consumer good:
The discussion is about the method using which certain financial statistics can be used as a useful indicator about the financial health of the economy. From the experience it is clear that by lowering the interest rates it will provide for an indication of good times. Whenever the interest rates were lower, it was a good time which evident from the recent experience.

The main economic indicator in this regard will be the spread between the rates that are demanded by the stable borrowers and the risky borrowers. This is because the rate of borrowing for risky borrower will be higher than...

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