The management of a well-known multinational corporation is infamous for “managing by the numbers.” The CEO and the Board of Directors set the target profits at the beginning of the year for each of the company’s divisions. The CEO and the Board have a policy of not interfering in the management of the divisions as long as they “make the numbers.” Division managers receive a year-end bonus if the targets are met.
Late in the fiscal year, one of the division managers realized that making that year’s profit target was not within reach. One of the ways the manager acted upon this information was to order the division to delay all purchases until the next reporting period. On the last day of the fiscal year, the manager discovered that a large purchase of component parts had been recently purchased on account and delivered, even though the parts were not needed for several months. To avoid recording the expense, the manager directed the accounting department to delay recognition of the delivery until the payable was due in the next reporting period. (Noreen, 2014)
Read the scenario below and respond to the questions.
What is the proper way to record the parts purchase? (Hint: Think through the journal entries and how each of these accounts is affected: Inventory, Cost of Goods Sold, and Accounts Payable.)
What Financial Statements are affected and when?
Does the manager’s directive to delay purchases actually affect the profit of the company for the current reporting period?
Are the manager’s actions ethical? Are they legal? Explain your opinion.
How could company policy have influenced the manager’s behavior?