Kalia Vang was just hired as the assistant treasurer of Yorkshire Stores, a specialty chain store company that has nine retail stores concentrated in one metropolitan area. Among other things, the payment of all invoices is centralized in one of the departments Kalia will manage. Her primary responsibility is to maintain the company’s high credit rating by paying all bills when due and to take advantage of all cash discounts.

Dennis Hirt, the former assistant treasurer, who has been promoted to treasurer, is training Kalia in her new duties. He instructs Kalia that she is to continue the practice of preparing all checks “net of discount” and dating the checks the last day of the discount period. “But,” Dennis Hirt continues, “we always hold the checks at least 4 days beyond the discount period before mailing them. That way we get another 4 days of interest on our money. Most of our creditors need our business and don’t complain. And, if they scream about our missing the discount period, we blame it on the mail room or the post office. We've only lost one discount out of every hundred we take that way. I think everybody does it. By the way, welcome to our team!”

Instructions

(a) What are the ethical considerations in this case?

(b) What stakeholders are harmed or benefited?

(c) Should Kalia continue the practice started by Dennis? Does she have any choice?

Answers to Business Insight and Accounting across the Organization Questions p. 221 Q: If a perpetual system keeps track of inventory on a daily basis, why do companies ever need to do a physical count?

A: A perpetual system keeps track of all sales and purchases on a continuous basic. This provides a constant record of the number of units in the inventory. However, if employees make errors in recording sales or purchases, the inventory value will not be correct.

As a consequence, all companies do a physical count of inventory at least once a year.

Broadening Your Perspective 265 p. 226 Q: If a company expects significant returns, what are the implications for revenue recognition?

A: If a company expects significant returns, it should make an adjusting entry at the end of the year reducing sales by the estimated amount of sales returns. This is necessary so as not to overstate the amount of revenue recognized in the period.

ps2 Q: Why have investors and analysts demanded more accuracy in isolating “Other gains and losses” from operating items?

A: Greater accuracy in the classification of operating versus nonoperating (“Other gains and losses”) items permit investors and analysts to judge the real operating margin, the results of continuing operations, and management's ability to control operating expenses.

Duzot Q: Explain how Wal-Mart’s profitability gave it a strategic advantage over Kmart.

A: If two competitors get into a “price war,” the company with the higher profitability can reduce prices further (thus eroding its gross profit rate), but still operate at a profit.

Thus, Wal-Mart’s success at minimizing its operating costs has enabled it to drive many competitors out of business.