CHAPTER 1: THE ACCOUNTANT’S ROLE IN THE Answer: True Difficulty: 2 Objective: 1

ORGANIZATION
7. Cost management provides information that helps increase value for customers.
TRUE/FALSE
Answer: True Difficulty: 1 Objective: 1
1. Management accounting information focuses on external reporting.
8. Just-in-time production and purchasing is a strategy used to reduce inventories.
Answer: False Difficulty: 1 Objective: 1 Answer: True Difficulty: 1 Objective: 2
Management accounting information focuses on internal reporting.
9. All strategies should be evaluated regarding the resources and capabilities of the
2. A good cost accounting system is narrowly focused on a continuous reduction company.
of costs.
Answer: True Difficulty: 1 Objective: 2
Answer: False Difficulty: 2 Objective: 1
A good cost accounting system is broadly focused to provide information that 10. The best-designed strategies are valuable whether or not they are effectively
helps managers at all levels implement, monitor, and evaluate company implemented.
strategies.
Answer: False Difficulty: 1 Objective: 2
3. Modern cost accounting plays a significant role in management decision Implementation is essential or the strategy is useless.
making.
11. The key to a company’s success is creating value for customers while
Answer: True Difficulty: 1 Objective: 1 differentiating itself from its competitors.

4. The balance sheet, income statement, and statement of cash flows are used for Answer: True Difficulty: 1 Objective: 2
financial accounting, but not for management accounting.
12. Developing a network of relationships with customers and suppliers is a
Answer: False Difficulty: 1 Objective: 1 valuable source of competitive advantage for a company.
The balance sheet, income statement, and statement of cash flows are used for
financial accounting and also for management accounting. Answer: True Difficulty: 1 Objective: 2

5. Financial accounting is broader in scope than management accounting. 13. An important strategic decision is making the correct investments in productive
assets.
Answer: False Difficulty: 2 Objective: 1
Management accounting is broader in scope than financial accounting. Answer: True Difficulty: 1 Objective: 2

6. Cost accounting measures and reports short-term, long-term, financial, and 14. It is difficult to control activities without a budget.
nonfinancial information.
Answer: True Difficulty: 1 Objective: 3
Chapter 1 Page 1
15. To take advantage of changing market opportunities, the annual budget should 22. Control includes deciding what feedback to provide that will help with future
be strictly enforced. decision making.

Answer: False Difficulty: 2 Objective: 3 Answer: True Difficulty: 1 Objective: 3

To take advantage of changing market opportunities, the annual budget should
be updated to reflect those changes. 23. Attention-directing activities should focus on cost-reduction opportunities, and
not on valued-adding opportunities.
16. A budget is a tool used to plan and express strategy.
Answer: False Difficulty: 1 Objective: 4
Answer: True Difficulty: 2 Objective: 3 Attention-directing activities should focus on cost-reduction opportunities and
value-adding opportunities.
17. Linking rewards to performance is a major deterrent to good management
performance. 24. For strategic decisions, scorekeeping is the most prominent role played by
Answer: False Difficulty: 1 Objective: 3 management accounting.
Linking rewards to performance helps to motivate good management
performance. Answer: False Difficulty: 2 Objective: 4
For strategic decisions, problem solving is the most prominent role played by
18. Employees pay little attention to how their performance is measured. management accounting.

Answer: False Difficulty: 1 Objective: 3 25. Management accountants often are simultaneously doing problem-solving,
Employees are very aware of how their performance is measured. scorekeeping, and attention-directing activities.

19. A budget may be used as a planning tool, but not as a control tool. Answer: True Difficulty: 1 Objective: 4
Answer: False Difficulty: 1 Objective: 3 26. Management accounting is playing an increasingly important role by helping
A budget may be used as a planning tool and also as a control tool. managers develop and implement strategy.
20. Financial accounting reports financial and nonfinancial information that helps Answer: True Difficulty: 1 Objective: 4
managers implement company strategies.
27. An example of problem solving is evaluating bids from three different
Answer: False Difficulty: 1 Objective: 3 companies to supply a particular part used in manufacturing.
Management accounting reports financial and nonfinancial information that
helps managers implement company strategies. Answer: True Difficulty: 2 Objective: 4
21. Feedback links planning and control. 28. Key success factors are geared to improving customer satisfaction.
Answer: True Difficulty: 1 Objective: 3 Answer: True Difficulty: 2 Objective: 5
Chapter 1 Page 2
29. Value chain refers to its value to the employee.
35. Customer focus is a key ingredient in new product development.
Answer: False Difficulty: 1 Objective: 5
Value chain refers to its value to the customer. Answer: True Difficulty: 1 Objective: 6

30. Companies have to follow strict guidelines when designing a management 36. Technological innovation has led to shorter product-life cycles and a need to
accounting system. bring new products to market more rapidly.
Answer: True Difficulty: 1 Objective: 6
Answer: False Difficulty: 1 Objective: 5
The design of a management accounting system should be guided by the 37. Key success factors include cost, quality, timeliness, and innovation.
challenges facing managers.
Answer: True Difficulty: 1 Objective: 6
31. An effective way to cut costs is to eliminate activities that do not improve the
product attributes that customers value. 38. Customers are demanding increased levels of performance in all aspects of the
value chain and the supply chain.
Answer: True Difficulty: 1 Objective: 6
Answer: True Difficulty: 1 Objective: 6
32. For optimal planning success it is best if each business function within the value
chain is performed one at a time in sequence. 39. When a particular aspect of employee performance is measured, employees pay
more attention to it.
Answer: False Difficulty: 1 Objective: 6
Optimally, success is achieved when two or more of the individual business Answer: True Difficulty: 2 Objective: 7
functions work concurrently as a team.
40. It is generally easy to quantify expected benefits and costs when applying the
33. For best results, cost management emphasizes independently coordinating cost-benefit approach.
supply chain activities within your company and not interfering with other
companies. Answer: False Difficulty: 2 Objective: 7
It is challenging and generally costly to quantify expected benefits and costs
Answer: False Difficulty: 2 Objective: 6 when applying the cost-benefit approach.
Cost management emphasizes integrating and coordinating supply chain
activities across all companies within the supply chain. 41. The use of teams to achieve corporate objectives is increasing.

34. Tracking what is happening in other companies is illegal. Answer: True Difficulty: 2 Objective: 8

Answer: False Difficulty: 1 Objective: 6 42. By reporting and interpreting relevant data, the controller exerts an influence
Tracking what is happening in other companies alerts managers to changes in that impels management toward making informed decisions.
their industry and can be accomplished in many legal ways such as visiting
competitor’s Web sites and reviewing their financial statements. Answer: True Difficulty: 2 Objective: 8
Chapter 1 Page 3
 c. current shareholder.
43. The controller (also called the chief accounting officer) is the financial d. department manager.
executive primarily responsible for both management accounting and financial
accounting. Answer: c Difficulty: 1 Objective: 1

Answer: True Difficulty: 1 Objective: 8 48. The person MOST likely to use management accounting information is a(n)
a. banker evaluating a credit application.
44. Management accountants have important ethical responsibilities that are related b. shareholder evaluating a stock investment.
to competence, confidentiality, integrity, and objectivity. c. governmental taxing authority.
d. assembly department supervisor.
Answer: True Difficulty: 1 Objective: 9
Answer: d Difficulty: 1 Objective: 1
MULTIPLE CHOICE
49. Financial accounting provides the PRIMARY source of information
45. Management accounting a. for decision making in the finishing department.
a. focuses on estimating future revenues, costs, and other measures to b. for improving customer service.
forecast activities and their results. c. for preparing the income statement for shareholders.
b. provides information about the company as a whole. d. for planning next year’s operating budget.
c. reports information that has occurred in the past that is verifiable and
reliable. Answer: c Difficulty: 2 Objective: 1
d. provides information that is generally available only on a quarterly or
annual basis. 50. Which of the following descriptors refers to management accounting
information?
Answer: a Difficulty: 2 Objective: 1 a. It is verifiable and reliable.
b. It is driven by rules.
46. Financial accounting c. It is prepared for shareholders.
a. focuses on the future and includes activities such as preparing next year's d. It provides reasonable and timely estimates.
operating budget.
b. must comply with GAAP (generally accepted accounting principles). Answer: d Difficulty: 2 Objective: 1
c. reports include detailed information on the various operating segments of
the business such as product lines or departments. 51. Which of the following statements refers to management accounting
d. is prepared for the use of department heads and other employees. information?
a. There are no regulations governing the reports.
Answer: b Difficulty: 2 Objective: 1 b. The reports are generally delayed and historical.
c. The audience tends to be stockholders, creditors, and tax authorities.
47. The person MOST likely to use ONLY financial accounting information is a d. It primarily measures and records business transactions.
a. factory shift supervisor.
b. vice president of operations. Answer: a Difficulty: 2 Objective: 1
Chapter 1 Page 4
 c. controlling costs.
52. Which of the following groups would be LEAST likely to receive detailed d. all of the above.
management accounting reports?
a. Stockholders Answer: d Difficulty: 1 Objective: 1
b. Sales representatives
c. Production supervisors 57. A data warehouse or infobarn
d. Managers a. is reserved for exclusive use by the CFO.
b. is primarily used for financial reporting purposes.
Answer: a Difficulty: 1 Objective: 1 c. stores information used by different managers for multiple purposes.
d. gathers only nonfinancial information.
53. Management accounting information includes
a. tabulated results of customer satisfaction surveys. Answer: c Difficulty: 1 Objective: 1
b. the cost of producing a product.
c. the percentage of units produced that are defective. 58. Cost accounting provides all EXCEPT
d. all of the above. a. information for management accounting and financial accounting.
b. pricing information from marketing studies.
Answer: d Difficulty: 1 Objective: 1 c. financial information regarding the cost of acquiring resources.
d. nonfinancial information regarding the cost of operational efficiencies.
54. Cost accounting
a. provides information on the efficiency of factory labor. Answer: b Difficulty: 2 Objective: 1
b. provides information on the cost of servicing commercial customers.
c. provides information on the performance of an operating division. 59. Management accounting includes
d. all of the above. a. implementing strategies.
b. developing budgets.
Answer: d Difficulty: 1 Objective: 1 c. preparing special studies and forecasts.
d. all of the above.
55. Which of the following types of information are used in management
accounting? Answer: d Difficulty: 1 Objective: 1
a. Financial information
b. Nonfinancial information 60. Financial accounting is concerned PRIMARILY with
c. Information focused on the long term a. external reporting to investors, creditors, and government authorities.
d. All of the above b. cost planning and cost controls.
c. profitability analysis.
Answer: d Difficulty: 2 Objective: 1 d. providing information for strategic and tactical decisions.

56. Modern cost accounting plays a role in Answer: a Difficulty: 2 Objective: 1

a. planning new products.
b. evaluating operational processes.
Chapter 1 Page 5
61. Financial accounting provides a historical perspective, whereas management d. building a strong distribution network.
accounting emphasizes
a. the future. Answer: d Difficulty: 2 Objective: 2
b. past transactions.
c. a current perspective. 66. Well-implemented just-in-time production and purchasing techniques
d. reports to shareholders. a. result in large stockpiles of inventory to keep production running.
b. strengthen a company’s ability to compete in the marketplace.
Answer: a Difficulty: 1 Objective: 1 c. increase reliance on long-term consumer forecasts.
d. reduce a company’s competitive edge.
62. Which of the following is NOT a function of a management accounting system?
a. Budget preparation Answer: b Difficulty: 2 Objective: 2
b. Financial reporting
c. Operational control 67. Long-term productive assets include
d. Product and customer costing a. cash.
b. manufacturing equipment and buildings.
Answer: b Difficulty: 2 Objective: 2 c. patents and trademarks.
d. brand names.
63. Strategy specifies
a. how an organization matches its own capabilities with the opportunities in Answer: b Difficulty: 1 Objective: 2
the marketplace.
b. standard procedures to ensure quality products. 68. Computer-integrated manufacturing (CIM) plants allow management to do all
c. incremental changes for improved performance. EXCEPT
d. the demand created for products and services. a. create brand recognition.
b. diagnose the reason for a defect.
Answer: a Difficulty: 2 Objective: 2 c. access timely and accurate information regarding production costs.
d. respond faster to changes in customer preferences.
64. Strategy is formulated by answering all of the following EXCEPT
a. Who are our most important customers? Answer: a Difficulty: 2 Objective: 2
b. Is industry demand growing or shrinking?
c. How can we continue to reduce production costs? 69. The Internet and the World Wide Web are PRIMARILY used to
d. How sensitive are purchasers to price, quality, and service? a. create performance reports.
b. collect cost data.
Answer: c Difficulty: 3 Objective: 2 c. enhance contact with customers and suppliers.
d. prepare budget information.
65. Building resources and capabilities includes
a. reducing available cash. Answer: c Difficulty: 2 Objective: 2
b. keeping inventory information private from suppliers.
c. building raw-material inventory levels. 70. Investments in long-term productive assets include all EXCEPT
Chapter 1 Page 6
 a. investments in robotics.
b. investments in information infrastructures. Answer: d Difficulty: 1 Objective: 3
c. investments in a high-quality parts inventory.
d. investments in Internet applications. 75. A budget can serve
a. as a planning tool.
Answer: c Difficulty: 2 Objective: 2 b. as a control tool.
c. as a basis for preparing financial statements.
71. In designing strategy, a company must match the opportunities and threats in the d. both (a) and (b).
marketplace with
a. those of the CFO (Chief Financial Officer). Answer: d Difficulty: 1 Objective: 3
b. its resources and capabilities.
c. branding opportunities. 76. Employees __________ how their performance is measured.
d. capabilities of current suppliers. a. pay close attention to
b. pay no attention to
Answer: b Difficulty: 2 Objective: 2 c. rarely know
d. both (b) and (c)
72. The process of preparing a budget
a. forces coordination and communication across business functions. Answer: a Difficulty: 1 Objective: 3
b. increases accounting efficiencies.
c. reduces overcapacity. 77. Linking rewards to performance
d. promotes production automation. a. helps to motivate managers.
b. allows companies to charge premium prices.
Answer: a Difficulty: 2 Objective: 3 c. should only be based on financial information.
d. does all of the above.
73. Control includes
a. implementing planning decisions. Answer: a Difficulty: 2 Objective: 3
b. evaluating performance.
c. providing feedback to help with future decision making. 78. Control measures should
d. all of the above. a. be set and not changed until the next budget cycle.
b. be flexible to allow for employees who are slackers.
Answer: d Difficulty: 1 Objective: 3 c. be kept confidential from employees so that competitors don’t have an
opportunity to gain a competitive advantage.
74. A budget d. be linked by feedback to planning.
a. is a quantitative expression of a proposed management plan.
b. helps translate strategy into actions. Answer: d Difficulty: 2 Objective: 3
c. aids in the coordination and communication among various business
functions. 79. A well-conceived plan allows managers the ability to
d. does all of the above. a. not make decisions again until the next planning session.
Chapter 1 Page 7
 b. keep lower-level managers from implementing change. 84. Making a recommendation regarding the leasing or purchasing of a fleet of
c. underestimate costs so that actual operating results will be favorable when vehicles is a PRIMARY example of
comparisons are made. a. problem solving.
d. take advantage of unforeseen opportunities. b. scorekeeping.
c. attention directing.
Answer: d Difficulty: 2 Objective: 3 d. both (a) and (b).
80. For control decisions, emphasis is place on the __________ role(s) of Answer: a Difficulty: 2 Objective: 4
management accounting.
a. problem-solving 85. _______________ means reporting and interpreting information that helps
b. scorekeeping managers to focus on operating problems, imperfections, inefficiencies, and
c. attention-directing opportunities.
d. both (b) and (c) a. Scorekeeping
b. Attention directing
Answer: d Difficulty: 2 Objective: 4 c. Problem solving
d. None of the above
81. For strategic decisions, emphasis is placed on the __________ role(s) of
management accounting. Answer: b Difficulty: 1 Objective: 4
a. problem-solving
b. scorekeeping 86. _______________ identifies several available alternatives and often
c. attention-directing recommends the best course to follow.
d. both (b) and (c) a. Scorekeeping
b. Attention directing
Answer: a Difficulty: 1 Objective: 4 c. Problem solving
82. Tracking the type of product returned is a PRIMARY example of d. None of the above
a. problem solving. Answer: c Difficulty: 1 Objective: 4
b. scorekeeping.
c. attention directing. 87. Management accounting is considered successful when it
d. both (a) and (b). a. helps creditors evaluate the company's performance.
b. helps managers improve their decisions.
Answer: c Difficulty: 2 Objective: 4 c. is accurate.
83. A daily sales report is a PRIMARY example of d. is relevant and reported annually.
a. problem solving. Answer: b Difficulty: 2 Objective: 4
b. scorekeeping.
c. attention directing. 88. Strategy should focus PRIMARILY on the organization’s
d. both (a) and (b). a. shareholders.
b. customers.
Answer: b Difficulty: 2 Objective: 4 c. products.
Chapter 1 Page 8
 d. employees.
93. The person(s) directly responsible for the attainment of organizational
Answer: b Difficulty: 2 Objective: 5 objectives is/are
89. Customers are demanding improved performance related to a. the treasurer.
a. reduced costs. b. line management.
b. both reduced costs and increased quality. c. the controller.
c. lower costs, improved quality, and improved customer service. d. the chief financial officer.
d. lower costs, improved quality, improved customer service, and innovative
products and services. Answer: b Difficulty: 1 Objective: 8

Answer: d Difficulty: 2 Objective: 6 94. As teamwork has become more prominent in the last few years, differences
between staff and line management
90. The act of simply measuring and reporting information a. have increased.
a. focuses the attention of employees on those processes. b. have become more important relative to promotions.
b. diverts employee’s attention to other activities. c. have diminished.
c. disproves the saying “What gets measured gets managed.” d. have only been evident in the employee reward system.
d. has no effect on employee behavior.
Answer: c Difficulty: 2 Objective: 8
Answer: a Difficulty: 2 Objective: 7
95. The Institute of Management Accountants (IMA)
91. Which statement is FALSE? a. is a professional organization of management accountants.
a. “What gets measured gets managed.” b. is a professional organization of financial accountants.
b. People react to measurements. c. issues standards for management accounting.
c. Employees spend more attention on those variables that are not getting d. issues standards for financial accounting.
measured.
d. “If I can’t measure it, I can’t manage it.” Answer: a Difficulty: 2 Objective: 8

Answer: c Difficulty: 2 Objective: 7 96. Line management includes

a. manufacturing managers.
92. The PRIMARY criterion when faced with a resource allocation decision is b. human-resource managers.
a. cost minimization. c. information-technology managers.
b. reduction in the amount of time required to perform a particular job. d. management-accounting managers.
c. achievement of organizational goals.
d. how well the alternative options help achieve organizational goals in Answer: a Difficulty: 2 Objective: 8
relation to the costs incurred for these systems.
97. Staff management includes
Answer: d Difficulty: 3 Objective: 7 a. manufacturing managers.
b. human-resource managers.
Chapter 1 Page 9
 c. purchasing managers. Required:
d. distribution managers. a. Study detailing sale information of the top-ten selling products.
b. Weekly report of total sales generated by each store in the metropolitan
Answer: b Difficulty: 2 Objective: 8 area.
c. Annual Report sent to shareholders.
98. Responsibilities of a CFO include all EXCEPT d. Monthly report comparing budgeted sales by store to actual sales.
a. providing financial reports to shareholders.
b. managing short-term and long-term financing. Answer:
c. investing in new equipment. a. (2) Nonroutine internal reporting
d. preparing federal, state, and international tax returns. b. (1) Routine internal reporting
c. (3) External reporting to investors and other outside parties
Answer: c Difficulty: 3 Objective: 8 d. (1) Routine internal reporting

99. The ______________ is primarily responsible for management accounting and Difficulty: 2 Objective: 1
financial accounting.
a. CFO (Chief Financial Officer)
b. CIO (Chief Information Officer)
c. treasurer 20. For each of the following activities, identify whether the main role of
d. controller accounting is (1) problem solving, (2) scorekeeping, or (3) attention directing.

Answer: d Difficulty: 1 Objective: 8 Required:

a. Analyzing the impact of introducing a new product on production.
100. All of the following report to the CFO EXCEPT the b. Comparing results between actual costs and budgeted costs for each step
a. controller. of manufacturing a product.
b. tax department manager. c. Preparing a report that analyzes changes in cost resulting from reducing
c. production manager. the number of tubing sizes used during production from six down to two.
d. treasurer. d. Reporting sales by branch for the sales manager.

Answer: c Difficulty: 1 Objective: 8 Answer:

a. (1) Problem solving
b. (3) Attention directing
c. (1) Problem solving
EXERCISES AND PROBLEMS d. (2) Scorekeeping

118. For each report listed below, identify whether the major purpose of the report is Difficulty: 2 Objective: 4
for (1) routine internal reporting, (2) nonroutine internal reporting, or for (3)
external reporting to investors and other outside parties.

Chapter 1 Page 10
 company must know the cost of each product and service to decide
125. Is financial accounting or management accounting more useful to an operations which products to offer and whether to expand or discontinue
manager? Why? product lines.
Answer: THREE: To control business operations that include comparing actual results
Management accounting is more useful to an operations manager because to the budgeted results and taking corrective action when needed.
management accounting reports operating results by department or unit rather
than for the company as a whole, it includes financial as well as nonfinancial Difficulty: 2 Objective: 1,2,3
data such as on-time deliveries and cycle times, and it includes quantitative as
well as qualitative data such as the type of rework that was needed on defective
units. 128. Briefly explain the planning and control activities in management accounting.
How are these two activities linked to each other?
Difficulty: 3 Objective: 1
Answer:
Planning business operations relates to designing, producing, and marketing a
126. What is strategy? Briefly describe the two broad types of strategies that product or service. This includes preparing budgets and determining the prices
companies may choose to pursue. and cost of products and services. A company must know the cost of each
product and service to decide which products to offer and whether to expand or
Answer: discontinue product lines.
Strategy specifies how an organization matches its own capabilities with the
opportunities in the marketplace to accomplish its objectives. In other words, Controlling business operations includes comparing actual results to the
strategy describes how a company will compete. budgeted results and taking corrective action when needed.
Companies follow one of two broad strategies. One is provide a quality product Feedback links planning and control. The control function provides information
or service at low prices. The other is to compete on their ability to offer a to assist in better future planning.
unique product or service that is generally offered at a higher price.
Difficulty: 2 Objective: 3
Difficulty: 2 Objective: 2

127. Briefly describe how managers make use of management accounting 129. Explain how a budget can help management implement strategy.
information.
Answer:
Answer: A budget is a planning tool, a quantitative expression of a plan of action. First
ONE: To choose strategy, to communicate it, and to determine how best to actions are planned and then communicated to the entire organization.
implement it.
The budget also helps with coordination.
TWO: To plan business operations related to designing, producing, and
marketing a product or service. This includes preparing budgets and Difficulty: 3 Objective: 3
determining the prices and cost of products and services. A
Chapter 1 Page 11
132. In most organizations, customer satisfaction is one of the top priorities. As business functions in addition to developing the capabilities of each
such, attention to customers is necessary for success. Briefly describe the four individual business function.
types of demands customers are currently placing on organizational
performance. 3. Key success factors Customers are demanding ever-improving levels of
performance regarding cost, quality, time, and innovation.
Answer: 4. Continuous improvement and benchmarking Continuous improvement
Cost: Organizations are under continuous pressure to reduce the cost of by competitors creates a never-ending search for higher levels of
the products or services they sell to their customers. performance within many organizations. Continuous improvement targets
are often set by benchmarking.
Quality: Customers are expecting higher levels of quality and are less
tolerant of low quality than in the past. Difficulty: 3 Objective: 6

Time: Time has many components: the time taken to develop and bring
new products to market; the speed at which an organization 135. How does a controller help “control” a company?
responds to customer requests; and the reliability with which Answer:
promised delivery dates are met. Organizations are under pressure By reporting and interpreting relevant data, the controller exerts a force or
to complete activities faster and to meet promised delivery dates influence that impels management toward making better-informed decisions.
more reliably than in the past in order to increase customer
satisfaction. The controller of Caterpillar described the job as “a business advisor to … help
the team develop strategy and focus the team all the way through
Innovation: There is now heightened recognition that a continuing flow of recommendations and implementation.”
innovative products or services is a prerequisite for the ongoing
success of most organizations. Difficulty: 3 Objective: 8

Difficulty: 2 Objective: 6 CASE ANALYSIS:

MANAGEMENT DECISION, ETHICS
133. Management accounting helps managers focus on four key themes. Briefly
52. Ken Franklin is the sales manager of Davidson Enterprises, a very profitable
describe each. distributor of office furniture to local businesses. A recent economic downturn has
Answer: created an extremely tight cash position, and the company has been hurt by the
bankruptcy of two key customers.
1. Customer focus is particularly critical This theme is central. Customers
are pivotal to the success of an organization. The number of organizations In late October, anticipating an economic recovery, Franklin began an extensive
aiming to be "customer-driven" is large and increasing. remodeling of the company's sales floor. Construction costs, decorating, and
equipment purchases are projected to cost $250,000.
2. Value-chain and supply-chain analysis This theme has two related
aspects (1) treating each area of the business function as an essential and Davidson has a policy that individual expenditures in excess of $200,000 must be
valued contributor, and (2) integrating and coordinating the efforts of all approved by the firm's board of directors. Franklin, unfortunately, missed the
deadline to have the board consider this project at its regular September meeting.
Not wanting to wait until the next meeting in December, he subdivided the project in
Chapter 1 Page 12
 two parts—construction and decorating ($190,000) and equipment purchases has published standards that focus on competence, confidentiality, integrity, and
($60,000)—neither of which needed board approval because of the dollar amounts credibility. In light of these standards, consider the three cases that follow.
involved.
Case A—Leston Corporation has experienced serious financial difficulties in
The project was recently completed and sales have begun to recover. Customers recent years. John Young, the company’s chief financial officer, has just learned
have raved about the new sales area, noting that it is far superior to those of that a major competitor was likely to file for bankruptcy; however, he failed to
Davidson's competitors. disclose this information at a board meeting held later that day when a plant
closure decision was being discussed. The board evaluated several proposals
Required: during the session that focused on improving Leston’s financial position.
A. Would Franklin's approach of subdividing the project in two parts have any
effect on the company's financial statements? Briefly explain. Case B—QBX Company manufactures fertilizer from various raw materials,
B. Briefly discuss whether Franklin behaved in an ethical manner. including a raw material know as Felstar. Paul Kelly, the firm’s purchasing
C. Which, if any, of the following standards of conduct would have applicability to manager, purposely acquired a lower grade of Felstar than normal because of a
Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly very attractive price. The lower-grade product resulted in increased usage during
explain. the manufacturing process but had no effect on the fertilizer’s overall quality. An
end-of-period report showed that QBX profited from Kelly’s actions, with the
LO: 9 Type: N overall savings in purchase price more than offsetting the cost of added
consumption.
Answer:
A. Although some extra processing is involved because of the "separate" projects, Case C—Central Distributing has a participative budgeting process, allowing
the same total costs will be incurred for the same assets. Thus, there is no impact employees to have a say in projected sales targets for the upcoming period.
on the financial statements, which serve to summarize financial activity. These targets are reflected in a series of performance reports that compare actual
sales achieved against targeted amounts. Hillary Baxter submitted very low sales
B. Franklin behaved in an unethical manner. Even though business is recovering targets because, as she confided in a colleague, "I always want to look good in
and customers seem more than satisfied with the new sales area, Franklin terms of meeting targets, even if anticipated sales and closures don’t materialize."
knowingly bypassed stated company policy. The project is being done in a
single phase, and is comprised of construction, decorating, and equipment Required:
acquisition. This is really one project; yet his accounting treatment implies Evaluate the three cases and determine the ethical issues, if any, that are involved.
otherwise. Cite the IMA’s standards if appropriate.

C. Two standards are relevant here. Integrity holds that managers refrain from LO: 9 Type: N
engaging in any conduct that would prejudice the ethical performance of duties.
Additionally, credibility recognizes that managers have a responsibility to Answer:
communicate information fairly and objectively, and disclose all relevant Case A: Young had an obligation to inform the other board members about the likely
information that could reasonably be expected to influence a user's bankruptcy, particularly in light of the company’s financial situation and the topics
understanding of the reports and data presented. under discussion at the meeting. The information could have affected the board’s
thinking on several matters. Two of the IMA standards are relevant here:
Possible Ethics Issues competence and credibility. Competence notes, in part, that members provide
decision-support information that is accurate and timely. Additionally, credibility
53. Many professions have adopted a series of ethical standards to provide guidance for holds that members disclose all relevant information that could influence a user’s
their memberships. The Institute of Management Accountants (IMA), for example,

Chapter 1 Page 13
 understanding of an analysis. Young’s silence violates both of these ethical
standards.

Case B: Kelly did not violate any ethical standards. The acquisition of sub-par
material was a sound business decision, particularly since QBX prospered financially
and quality of the end product did not suffer.

Case C: Baxter engaged in a somewhat common practice known as padding the

budget; nevertheless, one can conclude that such a practice is inconsistent with the
ethical standards of credibility and competence. Baxter is not providing full
knowledge of the sales situation by setting targets that are purposely low, thus
possibly misleading managers who attempt to analyze her performance.
Additionally, competence is involved because the information provided in setting the
sales targets is inaccurate.

DISCUSSION QUESTIONS

MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING

54. Briefly distinguish between managerial accounting and financial accounting. Be sure
to comment on the general focus, users, and regulation related to the two fields.

LO: 4 Type: RC

Answer:
Managerial accounting is concerned with providing information to personnel within
an organization so that they can plan, make decisions, evaluate performance, and
control operations. There are no rules and regulations associated with this field since
the information is intended solely for use within the firm.

Financial accounting, in contrast, focuses on financial statements and other financial

reports. This area deals with reporting to groups outside of an organization (e.g.,
stockholders, lenders, government agencies) so that some assessment of profitability
and overall financial health can be made. Given the large number of firms in our
economy and the varying level of user sophistication, the field is heavily regulated
(by the Financial Accounting Standards Board and, to a lesser degree, by the
Securities and Exchange Commission).

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