Question
Case Study: You are a member of the board of directors of Silver Cloud Computing, a new company that provides cloud computing services. The company
Case Study:
You are a member of the board of directors of Silver Cloud Computing, a new company that provides cloud computing services. The company began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. The following projected income statement and balance sheet was prepared by the external accountant prior to the start of operations. All amounts are in thousands.
Silver Cloud Computing | ||
Projected Income Statement | ||
First Year of Operations | ||
Sales |
| $105,000 |
Expenses: |
|
|
Wages and salaries | $30,000 |
|
Bad debt expense | 4,000 |
|
Depreciation | 50,000 |
|
Research and development | 12,000 | 96,000 |
Operating income before bonus |
| $ 9,000 |
Bonus |
| 900 |
Operating income |
| $ 8,100 |
Interest expense |
| 4,000 |
Income before taxes |
| $ 4,100 |
Income taxes (40%) |
| 1,640 |
Net income |
| $ 2,460 |
Silver Cloud Computing | |
Projected Balance Sheet | |
December 31 of First Year | |
Assets: |
|
Cash | $ 4,560 |
Accounts receivable, net of allowance of 4,000 | 32,000 |
Net computers | 150,000 |
Total assets | $186,560 |
Liabilities & Shareholders' Equity: |
|
Accounts payable | $ 4,100 |
Long-term debt | 80,000 |
Common stock | 100,000 |
Retained earnings | 2,460 |
Total liabilities and shareholders' equity | $186,560 |
A CEO was hired just prior to the commencement of operations. After examining the projections for the first year, the CEO presented the following suggestions and revised projected income statement to the board of directors at their meeting at the beginning of the year.
1. Slash research and development expenditures, which are paid in cash, from $12 million to $5 million.
2. Double the estimated life of the computers from 4 years to 8 years, which will decrease depreciation expense from $50 million to $25 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated.
3. Reduce the allowance for doubtful accounts by 50%.
Following is the revised projected income statement for Year 1 proposed by the CEO using the alternative accounting procedures and operating decisions.
(in thousands)
Sales |
| $105,000 |
Expenses: |
|
|
Wages and salaries | $ 30,000 |
|
Bad debt | 2,000 |
|
Depreciation | 25,000 |
|
Research and development | 5,000 | 62,000 |
Operating income before bonus |
| $ 43,000 |
Bonus |
| 4,300 |
Operating income |
| $ 38,700 |
Interest expense |
| 4,000 |
Income before taxes |
| $ 34,700 |
Income taxes (40%) |
| 13,880 |
Net income |
| $ 20,820 |
Additional notes:
The presidents compensation package at Silver Cloud Computing is a $1,000,000 salary with a cash bonus of 10% of operating income before the bonus.
Original depreciation of the computers was calculated using straight-line depreciation over a 4 year period with no salvage value.
The taxes and bonus are paid with cash.
Required:
Write a 5 - 7 page APA formatted paper from the viewpoint of a member of the board of directors that addresses the proposed changes, the future ramifications of those changes on the company, and any ethical issues related to the proposed changes. Provide a minimum of three references. Direct quotes should be limited to one per page.
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