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Recording Expenses and Managing Earnings to Meet Targets

Companies often try to manage earnings by recognizing revenue before it is actually earned according to GAAP, or by deferring expenses that have been incurred. For example, to meet the targeted earnings for a specific period. a company may capitalize a cost that should be expensed. Read the following scenario and then decide how you would handle this opportunity to manage earnings.

You are a division manager of a large public company. Your bonus is calculated on your division's net income targets that you must meet. This year that target is $1.5 million. You are authorized to sign off on any decision made within your division. You are faced with the following situation:

On November 15, your division of the company ordered $150,000 worth of supplies in anticipation for the seasonal rush. Most of these supplies will be used by year-end. These supplies were delivered on November 30. If you record this expense this year, your net income will be $1.45 million and you will not meet the target, and therefore not receive your bonus of $25,000 that you have worked hard for all year. What would you do and why? (1 to 2 Paragraphs)

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My decision in this situation would be to record the expense anyway and miss the target. Even though I would have to give up the bonus, I would not have to record the expense next year which would make it easier to reach the target the following year. In addition, according to GAAP guidelines, information that is relevant to a company's ...

Solution Summary

This solution discusses why the Expert would record the expense and miss the target in 240 words.