Assignment for ACCT 430-Fall 2016â€”Paper #2
(1) Upload an electronic copy (word or pdf) to Bb (your professor specific Bb account). Be sure to include your name and section time on the electronic document. You do not need to include the cover sheet with the document uploaded to Bb.
The paper uplink is located in the Content section and will be uploaded using Turnitin. If necessary, use the following link for help using Turnitin:
(2) Bring a printed copy to your enrolled section class on November 30, 2016. The printed copy must include a cover sheet. I the vent that you are unable to attend class on November 30th, you may leave your printed copy in your professorâ€™s mailbox (lobby of the Accounting Building) prior to 10:00 am on November 30th:
All papers must include a cover sheet which includes your name and your discussion section.
Papers must be typed, double spaced and printed on one side only.
There is no required format and no required minimum or maximum number of pages of your paper. The format and length of your paper should be as you consider necessary to professionally present your considerations and conclusions to the assignment questions. Your paper should include references to any of the models, tools, or codes you use for your analysis.
The assignment is an individual effort â€“ each student should prepare and submit a paper representing his or her own analysis and conclusions. 2
Paper #2 Assignment [Choose One of the Following Options]:
1. Study in depth the case of HealthSouth, using class materials, and any other research you wish to use. Consider the position of Aaron Beam, the CFO in the mid-1990â€™s, when the fraud began. Consider carefully also the character of Richard Scrushy, the founding CEO, and a man that Beam understood as extremely volatile, with firearms in his office. Put yourself in the place of Aaron Beam in the days immediately following Scrushyâ€™s demand that Beam cook the books, just before the close of the quarter. Following the methods we have used in class, write a paper in which you do the following:
a. Analyze the ethics of the decision Aaron Beam is considering, using the 7-step decision-making model, and at least two ethical frameworks.
b. In retrospect, Aaron Beam now says and apparently believes the he should have said â€œnoâ€ to Richard Scrushy, despite the fact that he says he feared for his life at the time. Considering the GVV curriculum, what enablers could Aaron Beam have cultivated, and what disablers did he need to disarm, in order to actually say No to Scrushy?
c. Craft a scenario that plausibly allows Aaron Beam to have said No to Richard Scrushyâ€”again, taking seriously the fact that he feared for his life. Whom should he have met with? When? Under what circumstances? And what should he have said?
2. Using the accompanying case entitled â€œCarney Textile Companyâ€:
a. Describe the accounting, operational and ethical issues of the case
b. Develop alternatives to be presented to Carney and discuss the pros and cons of each alternative
c. Decide on a course(s) of action and comment on how you would present your course of action.
Carney Textile Company
Carney Textile Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The companyâ€™s primary operations are located in Long Island City, New York, with branch factories and warehouses in several surrounding cities. Carney Manufacturing is a closely-held company. Abe Carney is the president of the company. He started the business in 1999 and it grew in revenue from $500,000 to $5.0 million in ten years. However, the revenues declined to $4.5 million in 2010. Net cash flows from all activities also were declining. The company was concerned because it planned to borrow $20 million from the credit markets in the fourth quarter of 2011.
Abe Carney met with Ann Plotkin, the chief accounting officer (CAO), on January 15, 2011, to discuss a proposal by Plotkin to control cash outflows. She was not overly concerned about the recent decline in net cash flows from operating activities because these amounts were expected to increase in 2011, as a result of projected higher levels of revenue and cash collections.
Plotkin knew that if overall capital expenditures continued to increase at the rate of 26 percent per year, Carney Manufacturing probably would not be able to borrow the $20 million. Therefore, she suggested establishing a new policy to be instituted on a temporary basis. Each plantâ€™s capital expenditures for 2011 would be limited to the level of capital expenditures in 2009. Abe Carney pointedly asked Plotkin about the possible negative effects of such a policy, but in the end Carney was convinced it was necessary to initiate the policy immediately to stem the tide of increases in capital expenditures. A summary of cash flows appears in Exhibit 1.
Sammie Markowicz is the plant manager at the headquarters location in Long Island City. He was informed of the new capital expenditure policy by Ira Sugofsky, the vice president for operations. Markowicz told Sugofsky that the new policy could negatively affect plant operations because certain machinery and equipment, essential to the production process, had been breaking down more frequently during the past two years. The problem was primarily with the motors. New and better models with more efficient motors had been developed by an overseas supplier. These were expected to be available by April 2011. Markowicz planned to order 1,000 of these new motors for the Long Island City operation, and he expected that other 4
plant managers would do the same. Sugofsky told Markowicz to delay the acquisition of new motors for one year after which time the restrictive capital expenditure policy would be lifted. Markowicz reluctantly agreed.
Carney Manufacturing operated profitably during the first six months of 2011. Net cash inflows from investing activities exceeded outflows by $250,000 during this time period. It was the first time in three years there was a positive cash flow from investing activities. Production operations accelerated during the third quarter as a result of increased demand for Carneyâ€™s textiles. An aggressive advertising campaign initiated in late 2010 seemed to bear fruit for the company. Unfortunately, the increased level of production put pressure on the machines and the degree of breakdown was increasing. A big problem was that the motors wore out prematurely.
Markowicz was concerned about the machine breakdown and increasing delays in meeting customer demands for the shipment of the textile products. He met with the other branch plant managers who complained bitterly to him about not being able to spend the money to acquire new motors. Markowicz was very sensitive to their needs. He informed them that the companyâ€™s regular supplier had recently announced a 25 percent price increase for the motors. Other suppliers followed suit and Markowicz saw no choice but to buy the motors from the overseas supplier. That supplierâ€™s price was lower, and the quality of the motors would significantly enhance the machinesâ€™ operating efficiency. However, the companyâ€™s restrictions on capital expenditures stood in the way of making the purchase.
Markowicz approached Sugofsky and told him about the machine breakdowns and concerns of other plant managers. Sugofsky seemed indifferent. He reminded Markowicz of the capital expenditure restrictions in place and that the Long Island City plant was committed to make expenditures at the same level as it had made in 2009. Markowicz argued that he was faced with an unusual situation and he had to act now. Sugofsky hurriedly left but not before he said to Markowicz: â€œA policy is a policy.â€
Markowicz reflected on the comment and his obligations to Carney Manufacturing. He was conflicted because he viewed his primary responsibility, and that of the other plant managers, as 5
ensuring that the production process operated smoothly. The last thing the workers needed right now was a stoppage of production because of machine failure.
At this time, Markowicz learned of a 30-day promotional price offered by the overseas supplier to gain new customers by lowering the price for all motors by 25 percent. Coupled with the 25 percent increase in price by the companyâ€™s supplier, Markowicz knew he could save the company $1,500, or 50 percent of cost, on each motor purchased from the overseas supplier.
After carefully considering the implications of his intended action, Markowicz contacted the other plant managers and informed them that while they were not obligated to follow his lead because of the capital expenditure policy, he planned to purchase 1,000 motors from the overseas supplier for the headquarters plant in Long Island City.
Markowicz made the purchase in the fourth quarter of 2011 without informing Sugofsky. He convinced the plant accountant to record the $1.5 million purchase in an inventory account because he knew the higher level of operating cash inflows would mask the effect of his expenditure. In fact, Markowicz was proud that he had â€œsavedâ€ the company $1.5 million and he did what was necessary to ensure that the Long Island City plant continued to operate.
The acquisitions by Markowicz and the other plant managers enabled the company to keep up with the growing demand for textiles and the company finished the year with record high levels of net cash inflows from all activities. Markowicz was lauded by his team for his leadership. The company successfully executed a loan agreement with Second Bankers Hours & Trust Co. The $20 million borrowed was received on January 3, 2012.
During the course of an internal audit on January 21, 2012, Beverly Wald, the chief internal auditor, discovered that there was an unusually high level of motors in the inventory. A complete check of inventory determined that $1.0 million of motors remained on hand.
Wald reported her findings to Ann Plotkin and together they went to see Abe Carney. After being informed of the situation, Carney called in Ira Sugofsky. When Wald told him about her 6
findings, Sugofskyâ€™s face turned beet red. He paced the floor, poured a glass of water, drank it quickly, and then began his explanation. Sugofsky told them about his encounter with Sammie Markowicz. Sugofsky stated in no uncertain terms that he had told Markowicz not to increase plant expenditures beyond the 2009 level. â€œI left the meeting believing that he understood the companyâ€™s policy. I knew nothing about the purchase,â€ he stated.
At this point Wald joined in and explained to Sugofsky that the $1 million is accounted for as inventory and not an operating cash outflow. â€œWhat we do in this case is transfer the motors out of inventory and into the machinery account once they are placed into operation because, according to the documentation, the motors added significant value to the asset.â€ Sugofsky had a perplexed look on his face. Finally, Abe Carney took control of the accounting lesson by asking: â€œWhatâ€™s the difference? Isnâ€™t the main issue that Markowicz did not follow company policy?â€ The three officers in the room shook their head simultaneously, perhaps in gratitude for being saved the additional lecturing. Carney then said he wanted the three of them to brainstorm some alternatives on how best to deal with the Sammie Markowicz situation and present the alternatives to him in one week. 7
Carney Textile Company
Summary of Cash Flows
For the Years Ended December 31, 2009 and 2010
December 31, December 31,
Cash Flows from Operating Activities
Net income $372 $542
Adjustments to reconcile net income to net
cash provided by operating activities 1,350 1,383
Net cash provided by operating activities $1,722 $1,925
Cash Flows from Investing Activities
Capital expenditures $(2,420) $(1,918)
Other investing inflows (outflows) 176 84
Net cash used in investing activities $(2,244) $(1,834)
Cash Flows from Financing Activities
Net cash provided (used in)
financing activities $ 168 $ (376)
Increase (decrease) in cash and
cash equivalents $ (354) $ (285)
Cash and cash equivalents â€“
beginning of the year $ 506 $ 791
Cash and cash equivalents â€“
end of the year $ 152 $ 506
10 % discount on an order above
Use the following coupon code :
Category: Business and Management