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R. J. Reynolds Tobacco Co Essay

2244 words - 9 pages

IntroductionThis paper will review the "R. J. Reynolds Tobacco Company" case study found in the 2nd edition of " Accounting for Managers: Texts and Cases". The primary accounting issue in this case is revenue recognition and questions relating to trade loading will be discussed and evaluated. An important set of non-accounting issues will also be presented that relate to possible unethical behavior that occurred during the leveraged buyout (LBO). Based on the facts presented, the paper will conclude by developing a plan of action R. J. Reynolds Tobacco Company (RJRT) could potentially take to improve their market standing to gain a competitive advantage.BackgroundIn the wake of events of Black Monday, the October 1987 stock market crash, the growing anti-smoking sentiment and the highly publicized tobacco litigation beginning to take place; RJR Nabisco's CEO F. Ross Johnson was looking for a way to raise their languishing stock price. Even though profits and sales were up, he still wanted to share the benefits of the company with the shareholders. The CEO is also concerned with the fallout he may receive from the board when they find out about the imminent failure of the 350 million dollar smokeless cigarette they are hoping will be a success which would boost the share price. (Burrough & Helyar, 1990)In October 1988, Johnson approached the board with the idea of a management led buyout of the company at $75 per share for a total value of $17 billion. In response to Johnson's idea, a special committee was formed to discuss putting RJR Nabisco up for auction. A bidding war ensued, and Shearson Lehman Hutton lost to Kohlberg Kravis Roberts & Co. (KKR) with a winning bid of $109 per share, $25 billion. While Kravis and Roberts of the KKR firm became famous for the largest LBO ever completed, Johnson made the December 1988 cover of TIME Magazine with the headline "A Game of Greed". (Burrough & Helyar, 1990)Once KKR took control in 1989, Kravis recruited Louis Gerstner, Jr., former President of American Express to become the new CEO of RJR Nabisco. He was tasked with correcting some of the previous issues that had occurred under Johnson's leadership. Brands had been starved of capital, acquisitions missed, and product arranged with practices such as "trade loading" in order to please Wall Street with a perfectly predictable earnings increase each quarter. (Sellers, 1993)During the late 1980s, in order to inflate quarterly results, RJRT frequently shipped more of their cigarettes to wholesalers than they had ordered, a practice the textbook refers to as trade loading. Wholesalers could have refused shipment to their already overstocked warehouses at any time; however, RJRT induced them to keep the excess inventory by promoting the product and offering discounts to customers. In addition, wholesalers could return the stale product and obtain a full refund for cigarettes more than six months old. RJRT would receive an excise tax credit for...

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