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.