Answered step by step
Verified Expert Solution
Question
1 Approved Answer
20Assignment%20 64% + Question 3 Bryan Eubank began his accounting career as an auditor for a Big 4 CPA firm. He focused on clients in
20Assignment%20 64% + Question 3 Bryan Eubank began his accounting career as an auditor for a Big 4 CPA firm. He focused on clients in the high-technology sector, becoming an expert on topics such as inventory write-downs, stock options, and business acquisitions. Impressed with his technical skills and experience, General Electronics, a large consumer electronics chain, hired Bryan as the company controller responsible for all of the accounting functions within the corporation. Bryan was excited about his new position- for about a week until he took the first careful look at General Electronics' financial statements. The cause of Bryan's change in attitude is the set of financial statements he's been staring at for the past few hours. For some time prior to his recruitment, he had been aware that his new employer had experienced a long trend of moderate profitability. The reports on his desk confirm the slight but steady improvements in net income in recent years. The disturbing trend Bryan is now noticing, Nthough, is a decline in cash flows from operations. Bryan has sketched out the following comparison his in millions): 2018 2015 2017 2016 $1,400 $1,320 $1,275 $1,270 Operating income 350 345 385 295 Net income 16 110 120 155 Cash flows from operations Profits? Yes. Increasing profits? Yes. So what is the cause of his distress? The trend in cash flows from operations, which is going to the opposite direction of net income. Upon closer review, Bryan noticed a couple events that, unfortunately, seem related: (0) The company's credit policy has been loosened, credit terms relaxed, and payment periods extended. This has resulted in a large increase in accounts receivable. The salaries of the CEO and CFO, are calculated based on reported net income. (ii) Required: (a) What is likely causing the increase in accounts receivable? How does an increase in accounts receivable affect net income differently than operating cash flows? (b). Explain why executive compensations for officers, such as the CEO and CFO, might increase the risk of earnings management. (c) Why is the trend of cash flows from operations, combined with the additional events, such a concern for Bryan? (d) What course of action, if any, should Bryan take
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started