I have a small issue with this question. Take a crack at it ppl - Jill Brown, CFA, is preparing a research report on Kendall Koatings, a maker of paint and industrial insulators. She has learned that Kendall is trying to avert a strike. Contentious labor talks have been ongoing for months. The company is also lobbying the federal government for a tax break in an effort to fend off foreign competition. Most Kendall executives own substantial blocks of stock, and all of them receive at least half of their compensation in the form of stock options. Lastly, one of Kendall’s lines of credit is up for renewal, and the company is trying to negotiate better terms. Several of Kendall’s top managers have a history of manipulating financial results. Based on her observations, which action is Kendall most likely to take? A) Treat all leases as operating leases. B) Assume that equipment has a useful life of eight years, rather than the five years currently assumed. C) Recognize revenue early.
option a: will keep assets off the balance sheet. so its D/E (leverage) would be higher. this will help the company in its bid to negotiate for better credit terms. option b: useful life of 8 years - will reduce depreciation, increase amount of net income. but since it is negotiating with the govt for better tax breaks - it is unlikely to do this option. option c: recognize revenue early - same issue - higher net income - which will cause its bid for higher tax breaks to be futile. so choice A?
a
B? as UL increases, the dep exp will dec and hence it’s an aggressive step (as expected)
I think it is C but B is close too. Very tough and all of them look close A - I don’t think so as by doing this their net income will be decreased so less remuneration for managers but this may also help them to negotiate better terms with union. B and C - This will increase NI. C would help them the most to manipulate earnings.
ahhh… cpk’s explaination makes perfect sense.
its A. cpk wins. the OA (official answer) references that the three factors mentioned, apart from the manager compensation, require management to report lower earnings, so option A accomplishes that best since three factors that call for lower EPS outweigh one factor that calls for higher EPS. my question is, if you are renegotiating credit terms i.e. business loan refinancing, which sane bank would give you a better deal if you show lower income / earnings / FICO score? wouldn’t a lower EPS signal bad debt propensity i.e. less favorable credit terms?
better credit terms saying I have earnings issues - but my earnings are not that bad. so give me instead of 45 days credit - make it 60 days… I have income to prove it, but not so much as to be able to pay off my creditors in 45 days… something to that effect.