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:

Economic Profit

The total revenue of a firm minus its explicit and implicit costs, representing the surplus income over and above what is needed to keep its resources in their next best alternative use.

Maximum Earning

The highest amount of revenue that a business can generate from its operations, often limited by market size or production capacity.

Competitive Price-Searcher

A market condition where firms actively seek to set prices competitively, often through the differentiation of products or services, to gain advantage over rivals.

Market Equilibrium

A condition or state where the quantity demanded of a good or service at a certain price equals the quantity supplied, leading to a stable market condition.