HWCh.1

Exercise 1-1 (10 minutes)

1. Managerial accounting, financial accounting 2. Planning

3. directing and motivating 4. feedback 5. decentralization 6. line 7. staff 8. controller 9. budgets

10. performance report 11. Chief Financial Officer 12. precision; nonmonetary data

Problem 1-4 (20 minutes)

1. No, Sarver did not act in an ethical manner. In complying with the president?s instructions to omit liabilities from the company?s financial statements he was in direct violation of the IMA?s

Statement of Ethical Professional Practice. He violated both the “Integrity” and “Credibility” guidelines on this code of ethical conduct. The fact that the president ordered the omission of the liabilities is irrelevant.

2. No, Sarver?s actions can?t be justified. In dealing with similar situations, the Securities and Exchange Commission (SEC) has consistently ruled that “…corporate officers…cannot escape culpability by asserting that they acted as ?good soldiers? and cannot rely upon the fact that the violative conduct may have been condoned or ordered by their corporate superiors.” (Quoted from: Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In Defense of the Management Accountant,” Management Accounting, May, 1990, p. 55) Thus, Sarver not only acted

unethically, but he could be held legally liable if insolvency occurs

and litigation is brought against the company by creditors or

others. It is important that students understand this point early in the course, since it is widely assumed that “good soldiers” are justified by the fact that they are just following orders. In the case at hand, Sarver should have resigned rather than become a party to the fraudulent misrepresentation of the company?s financial statements.

Problem 1-7 (20 minutes)

1. If all automotive service shops routinely tried to sell parts and

services to customers that they didn?t really need, most customers would eventually figure this out. They would then be reluctant to accept the word of the service representative that a particular problem needs to be corrected—even when there is a legitimate problem. Either the work would not be done, or customers would learn to diagnose and repair problems themselves, or customers would hire an independent expert to verify that the work is really needed. All three of these alternatives impose costs and hassles on customers.

2. As argued above, if customers could not trust their service representatives, they would be reluctant to follow the service representative?s advice. They would be inclined not to order the work done even when it is really necessary. And, more customers would learn to do automotive repairs and maintenance themselves. Moreover, customers would be unwilling to pay as much for work that is done since customers would have reason to believe that the work may be unnecessary. These two effects would reduce demand for automotive repair services. The reduced demand

would reduce employment in the industry and would lead to lower overall profits.

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