Acc322 Case Study

Case 1 – Warranty

         In this situation, Joe Craig should not follow his boss’s suggestion. While following the suggestion to lower the warranty expense estimate will bring Joe some preferential treatment from his boss, reducing it for the purposes of ensuring a renewed credit line poses risk for their company in the future. If Joe reduces his estimate, the actual liability is likely to be greater then the estimated expense, thus showing more substantial losses for next period.

         Revising the warranty estimate will pose an ethical dilemma as well. If the warranty expense estimate is decreased, S&G Fasteners will most likely get a renewed credit line. Initially, a renewed credit line would result in freer cash flows and would give the company ability to pay their liabilities on time. Alternatively, with no credit line, the company would be on a much tighter budget. Allocating less funds to the warranty expense would also result in more financial liberty initially, but when the actual warrant claims come in, it will be more difficult to find the funds to pay for those expenses, especially when the credit source might not be available anymore.

        All of the parties involved will be affected if the suggestion to reduce the warranty expense estimate is followed. As mentioned above, Joe Craig will likely get temporary favoritism, until the actual warranty expenditures exceed the estimates, showing a greater loss in the next period, when the problem will likely be blamed on him. The S&G Fasteners will experience some relief at first, but later, when the actual expenses catch up, will find themselves with a great than expected losses and no credit source. The bank will experience a higher risk because of being provided inaccurate estimates about the company’s profit margins, which in turn will negatively affect the company’s ability to pay off debt.

Case 2 – Share Buyback

        The buyback of shares will provide a “quick fix” for the company’s EPS by lowering the amount of outstanding shares. Since Earnings Per Share is a proportion of Net Income to Shares Outstanding, reducing the shares outstanding would increase the proportion of the earnings to shares. If the EPS increases, the shares seem more favorable in the market, thus the demand for them increases. The proposal is ethical since no one is negatively impacted by it. The currently undervalued shares will be at a greater demand once the EPS rises, and with demand the share prices will rise, too. The company as well as the investors would be affected if the proposal is implemented. As mentioned above, the increase in the EPS will lead to higher share prices, benefiting the company as well as the investors.