Phoenix Press produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating income over the past 9 months, primarily due to an economic recession and a depressed consumer housing market. The division's controller, Sophie Gellar, has felt pressure from the CFO to improve her division's operating results by the end of the year. Gellar is considering the following options for improving the division's performance by year-end:

a. Cancelling two of the division's least profitable magazines, resulting in the layoff of 25 employees.

b. Selling the new printing equipment that was purchased in January and replacing it with discarded equipment from one of the company's other divisions. The previously discarded equipment no longer meets current safety standards.

c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before fiscal year-end) instead of showing it as a liability.

d. Reducing the liability and related expense related to employee pensions. This would increase the division's operating income by 3%.

e. Recognizing advertising revenues that relate to January in December.

f. Switching from declining balance to straight-line depreciation to reduce depreciation expense in the current year.

Required

1. What are the motivations for Gellar to improve the division's year-end operating earnings?

2. From the point of view of the "Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management," Exhibit 1-7 (page 17), which of the preceding items (a-f) are acceptable?

Which are unacceptable?

3. What should Gellar do about the pressure to improve performance?

Exhibit 1-7

Transcribed Image Text:

STATEMENT OF ETHICAL PROFESSIONAL PRACTICE Members of IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles that express our values, and standards that guide our conduct PRINCIPLES IMA's overarching ethical principles include: Honesty, Faimess, Objectivity, and Responsibility Members shall act in accordance with these principles and shall encourage others within thei organizations to adhere to them. STANDARDS A member's failure to comply with the following standards may result in disciplinary action, I. COMPETENCE Each member has a responsibility to: Maintain an appropriate level of professional expertise by continually developing knowledge and skills. 2 Perform professional duties in accordance with relevant laws, regulations, and technical standards. 3. Provide decision support information and s that are accurate, clear, concise, and timely. 4 Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Each member has a responsibility to: 1. Keep information confidential except when disclosure is authorized or legally required. 2 Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates" activities to ensure compliance. Refrain from using confidential information for unethical or llegal advantage. III. INTEGRITY Each member has a responsibility to: 1. Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts 2 Refrain from 3. Abstain from engaging in or supporting any activity that might discredit the profession engaging in any conduct that would prejudice carrying out duties ethically. IV. CREDIBILITY Each member has a responsibility to: 1. Communicate information fairly and objectively. 2 Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.