ISSUES IN ACCOUNTING EDUCATION Vol. 28, No. 1 2013 pp. 115-129 American Accounting Association DOI:2308/iace-50296 Good Intentions at Good Grains,...
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ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 28, No. 1 DOI: 10.2308/iace-50296 2013 pp. 115–129 Good Intentions at Good Grains, Inc. Susan B. Hughes, Cathy Beaudoin, and Russell R. Boedeker ABSTRACT: This case addresses the ‘‘ gray ’’ area associated with the use of accounting discretion as it relates to expense line item reclassifications. Such a context allows for an examination of the pressures that influence accounting decisions, and provides a glimpse into how managers might manage reported expenses. The reader meets analyst David Johnson when, as a result of both internal and external pressure to keep research and development (R&D) costs within budget, he is asked to find ways to reclassify R&D costs into other expense areas. As a result of the request, David immerses himself in the task in order to identify, within generally accepted accounting principles (GAAP), opportunities to reclassify R&D expenses to cost of goods sold. He ultimately proposes three separate reclassification entries that, although technically within GAAP guidelines, involve the use of accounting discretion. All three entries are approved by the accounting team. Financial accounting, managerial accounting, and M.B.A. students report that the case enhanced their knowledge of financial reporting and helped them understand ethical considerations associated with the preparation of financial statements. Accounting professionals report the case realistically depicts what accountants face in the workplace. A case extension using International Financial Reporting Standards (IFRS) is also provided. Keywords: earnings management; accounting discretion; business ethics; ±nancial reporting; expense reclassi±cation; International Financial Reporting Stan- dards (IFRS). CASE General Background Information In May 2010, David Johnson earned his Bachelor of Science degree in Fnance from Central State University. At the time he entered college, he assumed that he would be able to leverage his education into a great entry-level position in investment banking or Fnance. However, while he was in college, the U.S. economy went into a recession that reduced the number of entry-level jobs for college graduates. During his senior year, David doubled and redoubled his job search efforts and applied to many manufacturing and consumer products companies he had not previously considered. Two weeks prior to graduation he was Fnally offered his current job as a Fnancial Susan B. Hughes is an Associate Professor and Cathy Beaudoin is an Assistant Professor, both at The University of Vermont; and Russell R. Boedeker is a Finance Professional in Portland, Oregon . The authors gratefully acknowledge the insightful and thought-provoking comments from the editor, an associate editor, and three reviewers. They were instrumental in developing this Fnal version of the case. Published Online: September 2012 115
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analyst at Good Grains, Inc. He started in June 2010 and for the past year, he has been concentrating on performing all aspects of his job to the best of his abilities. David Fnds his Fnance background useful when he is working on many aspects of his job responsibilities. Over the past six months, he has tracked product promotion expense, analyzed overhead, and compiled information related to inventory costs and research and development (R&D) expenses. But he knows he still does not understand how Good Grains’ strategy impacts each of these line items on the Fnancial statements, and he realizes he knows very little about U.S. generally accepted accounting principles (GAAP) and the U.S. Securities and Exchange Commission’s (SEC) requirements for public companies. His career mentor, Good Grains’ Chief ±inancial OfFcer (C±O), encouraged him to enroll in the accounting master’s degree program at the local university. David knows that he is working in a very competitive work environment and decides to take the advice. He hopes the additional knowledge that he acquires throughout the program will help him excel at his job. Ultimately, this should help him increase his chances for regular promotion and annual bonuses. Given the state of the economy and the number of his friends who are still looking for full-time jobs, David is willing to invest whatever time and effort it takes to be recognized as a good performer at Good Grains. Good Grains’ Healthy Cereal Initiative One reason David was attracted to Good Grains is its reputation for nutritious, high-quality, grain-based foods. As a child, he loved Good Grains’ cereals, and he always tried to convince his mom to buy as many boxes of the different varieties as possible. His birthdays and half-birthdays brought the special treat of one of the really fun cereals, the ones his mom said had too much sugar on their regular shopping trips. Remembering back to those special treats, he thinks it’s great that Good Grains’ R&D department is hard at work to reformulate many of the cereals. Their stated goal is to lower the sugar and increase the whole-grain content of the top 25 percent of the product line, while maintaining the same taste and texture that consumers have come to know and love. David knows R&D is expected to develop and taste test production-ready product within the next nine months. David hopes the R&D department can deliver. He knows that Good Grains’ competitors are also working to reduce the sugar content of their breakfast offerings. Given the public’s current focus on good value and more healthy foods, Good Grains’ management group is convinced that the Frst major producer to deliver a great-tasting, lower-sugar-content product is sure to control the majority of the cereal market. The Good Grains’ Healthy Cereal Initiative was spearheaded by its president, a savvy market analyst. She convinced the Board of Directors to make signiFcant investments in new product lines. She clearly understands the importance of successfully achieving the R&D targets. David has heard a few rumors that she is now facing additional pressure from both the Board and Wall Street analysts to increase Good Grains’ return on investment (ROI). David understands that the past three years’ investments in new product lines were expected to improve gross margins and increase the company’s proFtability. He’s a little unsure about some other things he has been hearing; most importantly, comments about how Good Grains continues to try to manage its Fnancial results to meet Wall Street’s expectations. The Coffee Chat One morning, David was reFlling his coffee cup when Good Grains’ Controller, Rebecca Carey, walked into the break room. David always enjoyed talking with Rebecca. His coworkers told him she’s the one who went to bat for him after he interviewed at Good Grains, and he appreciates her faith in him. Besides that, he respects her ability to communicate the complexities of the business and how they are re²ected in the Fnancial statements. David asked her if she had just a few 116 Hughes, Beaudoin, and Boedeker Issues in Accounting Education Volume 28, No. 1, 2013
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Case Study 1 The business issue the company is dealing with is the investment banking and finance as
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