A bank has lending arrangements with three companies, including a 40% benchmark for the debt/equity ratio. Bank borrowing is the only form of debt which the companies have. Company Borrowing 150,000 150,000 150,000 Equity 400,000 750,000 2,000,000 Purpose of Borrowing CEO bonus based on Building Fleet Of Vehicles Overdraft facility Shares Share options Cash The following table summarises changes in accounting policies in the current year Company Depreciation A B c Required NO change From reducing balance to units of use From straight line to reducing balance Doubtful Debts From 5% to 3% No change From 2% to 4% Inventory From WAC to FIFO From FIFO to WAC No change iv As a loan manager, briefly outline how the purpose of each loan would affect debt covenants with customers. Briefly outline which company is most likely to engage in under-investment. For the company in (ii), explain two ways in which the accounting policy changes may have contributed to earnings management. For the company in (ii), Suggest another specific earnings management Strategy that it may use apart from changing accounting policies. 2 marks 2 marks 4 marks 2 marks A bank has lending arrangements with three companies, including a 40% benchmark for the debt/equity ratio. Bank borrowing is the only form of debt which the companies have. Company Borrowing 150,000 150,000 150,000 Equity 400,000 750,000 2,000,000 Purpose of Borrowing CEO bonus based on Building Fleet Of Vehicles Overdraft facility Shares Share options Cash The following table summarises changes in accounting policies in the current year Company Depreciation A B c Required NO change From reducing balance to units of use From straight line to reducing balance Doubtful Debts From 5% to 3% No change From 2% to 4% Inventory From WAC to FIFO From FIFO to WAC No change iv As a loan manager, briefly outline how the purpose of each loan would affect debt covenants with customers. Briefly outline which company is most likely to engage in under-investment. For the company in (ii), explain two ways in which the accounting policy changes may have contributed to earnings management. For the company in (ii), Suggest another specific earnings management Strategy that it may use apart from changing accounting policies. 2 marks 2 marks 4 marks 2 marks