The President of Sampson Ltd

question 60

Essay

The president of Sampson Ltd.has approached the controller for the company with concerns over the projected year end results.The company needs to present its financial statements to the bank to renew its loan and the president is concerned that the loan may either be denied,or the renewal terms will impose a much higher interest rate.The following summarizes the conversation between the president and the controller:
President: I am very concerned about the upcoming loan renewal.Our cash position is low and our operating results for the year were not as strong as expected.Our unit cost of production has come in at $1,800 based on equivalent units of production of 2,590.I know that currently we have 600 units in ending work in process that are only 15% complete.If we were to reclassify these as 80% complete,we would increase our equivalent units of production by 390.Since all of our 2,500 completed units were sold,this reclassification would lower our unit costs,reduce cost of goods sold and increase our ending work in process inventory which could be used as collateral.This would improve our financial position and allow us to renew our loan and keep our current rate of interest.
Controller: I think this is risky.It would be easy to determine that the units are not 80% complete.
President: I don't see how.By the time we are audited,the units will have long since been completed and shipped to customers.
Required:
Assume you are the controller for Sampson Ltd.and that you hold a professional accounting designation.a.Determine the impact of the president's proposal on the financial results for Sampson Ltd.
b.Referring back to the standards of ethical conduct,what should you do as controller?

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Definitions:

Distribution

In statistics, the way in which values of a variable or frequencies of occurrence are spread out over a range.

Earnings

The amount of money that an individual or business receives in exchange for providing a good or service or through investing capital.

Sorority

A sorority is a social organization at colleges and universities primarily for female students, often characterized by a system of values, sisterhood, and philanthropic activities.

Normal Curve

A symmetrical bell-shaped curve that represents the distribution of many types of data in statistics.