Management

Question 1 (10 Marks)

Jazeera Publishing House produces consumer magazines. The house and home

division which sells home improvement and home decorating magazines, has seen a

20% reduction in operating income over the past nine months, primarily due to the

recent economic recession and the depressed consumer housing market. The division’s

Controller, Henry Bald, has felt pressure from the CFO to improve his division’s

performance by the end of the year. Henry is considering the following options for

improving the division’s performance by year-end:

a) Cancelling two of the division’s least profitable magazines, resulting in the

layoff of twenty-five employees.

b) Selling the new printing equipment that was purchased in January and

replacing it with discarded equipment from one of the company’s other

divisions. The previously discarded equipment no longer meets current

safety standards.

c) Reducing the division’s Allowance for Bad Debt Expense. This transaction

alone would increase operating income by 5%.

d) Recognizing advertising revenues that relate to January in December.

e) Switching from declining balance to straight-line depreciation expense in

the current year.

1. What are the motivations for Henry to improve the division’s year-end

operating earnings?

2. From the point of view of the “Standards of Ethical Behavior for

Practitioners of Management Accounting and Financial Management,”

identify which of the items from (a - e) are acceptable? Which are

unacceptable? Explain your reasons.

3. What should Henry do about the pressure to improve performance?