Question

C 16-9

Ethics and EPS Adjustment

Ryan Company has as a goal that its earnings per share should increase by at least 3% each year; this goal has been attained every year over the past decade. As a result, the market price per share of Ryan's common stock also has increased each year. Last year (2015), Ryan's earnings per share was $3. This year, however, is a different story. Because of decreasing sales, preliminary computations at the end of 2016 show that earnings per share will be only $2.99 per share.

You are the accountant for Ryan. Ryan's controller, Jim Nastic, has come to you with some suggestions. He says, “I've noticed that the decrease in revenues has been primarily related to credit sales. Since we have fewer credit sales, I believe we are justified in reducing our bad debts expense from 4% to 2% of net sales. I also think that because of the decreased sales, we won't use our factory equipment as much, so we can extend its estimated remaining life from 10 to 15 years for computing our straight-line depreciation expense. Based on my calculations, if we make these changes, Ryan's 2016 earnings per share will be $3.06. This will sure make our shareholders happy, not to mention our CEO. You may even get a promotion. What do you think?”

Required:

1. From financial reporting and ethical perspectives, prepare a response to Jim regarding his suggestions.

Answer 1

Ansucer:- Summatized the information provided in the question, Ryan company has as a goal- * Preparing a response to Jim regarding his suggestions, Ethical issues related to earnings per share adjustment: Econings per chases(EPS): The shade og portion of profit earned by each share for company is called as econings per share. • Response to mr.J controller of company R regarding his suggestions: Financial reporting perspective; → The cause and effect suggestion relating to matching the revenues and expenses in Begard to seduction in bad debts expense.

is not justified because reduction in credit sales doesn't make up for reduced uncollectible percentage. Instead reduction in credit sales due to sticker Credit policies would warrant reduction in uncollectable percentage. → The systematic and rational allocation suggestion relating to change in de pre- ciation expense method is also not justified because change in useful life is inappropriate in straight line methed. But, if the change in method is based on factory equipment, the company can shift to activity-based method, reduce the useful life, and report the same. Ethical perspective: y at the outset, reporting reduced expenses to inflate net income so as to maintain the goal of 3% increase in EPS not ay poopriate. → Reduring the expenses is justified if It depicts the economic reality on the financial statement is

with the This issue leads to mis representation of value of investment of the company, if the increase in income is not associated economic beality as potrayed to the potential shareholders. please - please kindly Up-vote. Thank you