The CEO of the company you are interning for states that hernumber one goal for the year is to maximize the companyâs profit.Is that the same thing as maximizing shareholder value? Why or whynot? Give an example of something the company could do that wouldlead to higher profits this year, but would actually harmshareholder value maximization in the long term.

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Hubert KochLv2

28 Sep 2019

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Case 2.1 The Tex tech Company

When you hired Dan to manage your business, the TexTech Company,you agreed to pay him a bonus of 10% of profit at the end of eachyear. There are now two projects available for investment byTexTech, but it can only take on one of them: Project A willgenerate profits of $50,000 per year, and the detailed financialcalculations show that it will increase the value of the company by$123,000. Project B will generate profits of $40,000 per year butwill increase the companyâs value by $125,000.

Which project is Dan likely to choose, and why?
Which project would you, the owner of the company, prefer?
By what means can the owners of the company encourage Dan tofocus on ownersâ wealth maximization?

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byzantiumtortoise706

Choice 1 is 100 percent stock options with a four-year vesting schedule and a 10-year life. Choice 2 is 50 percent stock options and 50 percent performance shares, which are based on the companyâs total shareholder return compared with the S&P 500 over a three-year period.

"The first two choices are catering to people who are willing to roll the dice," Herman says, adding that the payouts are vulnerable to market conditions.

The third and fourth choices are quite different. They are based on "economic value added," a metric devised by Best Buy that uses an internal formula that changes from year to year. They involve the meeting of one-year performance targets, but employees canât access the rewards for three years.

Choice 3 offers 50 percent stock options and 50 percent restricted stock, which is awarded at the end of three years for performance measured against the companyâs economic-value-added goal at the end of 2007. Choice 4 offers 50 percent restricted stock and 50 percent performance units, both earned at the end of three years, based on company performance against the economic-value-added goal at the end of 2007.

It might sound like a lot of delayed gratification, but at the end of 2007, employees can clearly see what they will get three years later, Herman says.

1. why do you think so many of Best buy executives opted for choice 1 or 2? What would you do to encourage more employees to adopt choices 3 and 4?

2. does this best buy compensation program satisfy line of sight requirements? Which of the four choices do you think has the most direct line of sight?

3. what additional compensation elements would you add to the best buy compensation package?

sangriaturtle634

The following situations are independent of one another.

1. An accounting student recently employed by a small company doesnât understand why the company is only depreciating its buildings and equipment, but not its land. The student prepared journal entries to depreciate all the companyâs property, plant, and equipment for the current year-end.

2. The same student also thinks the companyâs amortization policy on its intangible assets is wrong. The company is currently amortizing its patents but not its goodwill. As a result, the student added goodwill to her adjusting entry for amortization at the end of the current year. She told a fellow employee that she felt she had improved the consistency of the companyâs accounting policies by making these changes.

3. The same company has a building still in use that has a zero book value but a substantial fair value. The student felt that this practice didnât benefit the companyâs usersâespecially the bankâand wrote the building up to its fair value. After all, she reasoned, you can write down assets if fair values are lower. Writing them up if fair value is higher is yet another example of the improved consistency that she has brought to the companyâs accounting practices. Explain whether or not the accounting treatment in each of the above situations is in accordance with generally accepted accounting principles.

Explain what accounting principle or assumption, if any, has been violated and what the appropriate accounting treatment should be.

sangriaantelope912

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