To the uneducated, the details of the accounting processes that support organizations may seem trivial. In the real world, however, the consequences can be serious. Financial data is used to support decision making and to guide the organization. Employees may be laid off, operations may be shut down, or new product development efforts canceled, all based on financial statements and analysis. With the stakes so high, the members of an organization’s accounting and finance teams are likely to spend as much or more time explaining financial statements to decision makers as they do actually developing them. This is the situation you will face in this assignment.
Upon successful completion of this assignment, you will be able to:
- Explain the impact of adjusting transactions on a company’s financial statements.
- Evaluate the impact of various managerial decisions on a company’s financial position.
- Textbook: Principles of Accounting: Volume 1, Financial Accounting
- File: Financial Accounting Chapter 3
- File: Financial Accounting Chapter 4
- Video-recording Software
Parsi Onious is upset. As a manager in the purchasing department, he has just received an ugly surprise, which has brought him to your doorstep.
Parsi manages the team of professional buyers responsible for procuring all of the company’s raw materials. This includes hundreds of millions of dollars of metals, chemicals, and plastics each year from around the globe. These materials are used in the manufacture of the company’s products, including a new line of refrigerators that was launched just last year. As buyers, Parsi’s team is primarily measured on the cost of the materials they purchase. They are expected to work hard to continuously bring down these costs and to help the company stay competitive.
However, Parsi is also personally responsible for producing financial forecasts. Using his inside knowledge of material costs, he is expected to create estimates of how much the company will spend on these materials each month and quarter. These forecasts are used by executives when they communicate with investors. The company sets public earnings targets, so it is critical the forecasts be reliable. Unfortunately, Parsi’s forecast for the last quarter was off by a large margin, and now the Vice President of Operations is demanding answers.
When the company purchases raw materials, a debit is recorded against inventory, while a credit is made to accounts payable. Later, after the company manufactures and ships its products to the customer, a credit is made against inventory, recording the consumption of the raw materials. Meanwhile, in accordance with the expense recognition (matching) principle, cost of goods sold is debited. Parsi’s team is measured based upon the cost of materials, so this transaction is very important to them. Parsi is forecasting how much cost of goods sold will be expensed each month and quarter.
Finished products contain a certain amount of raw material. Herein lies the problem. The engineering team estimated that each refrigerator contains 11.22 pounds of polyurethane foam, an expensive chemical used for insulation. When the refrigerators are shipped, inventory is credited for 11.22 pounds of polyurethane, while 11.22 pounds is simultaneously debited against cost of goods sold as an expense. However, a physical inventory count conducted at the end of the quarter determined that $350,000 of polyurethane was missing. Apparently much more than 11.22 pounds was being consumed in the manufacture of each refrigerator.
The inventory report triggered the company’s accounting department to create an adjusting journal entry. Since this was unexpected, the adjustment resulted in Parsi’s forecast for cost of goods sold to be off by $350,000. As a member of the finance team supporting Parsi, it has now fallen to you to explain the transaction. He doesn’t understand why he is being “penalized” for an apparent inventory control problem at the manufacturing plant, and fears being blamed. Parsi wants to be able to defend himself to the Vice President of Operations, which means he needs to know what happened and how it can be prevented in the future.
- Review the rubric to make sure you understand the criteria for earning your grade.
- In your textbook, Principles of Accounting, read Chapters 3 and 4, “Analyzing and Recording Transactions” and “The Adjustment Process.”
- Download and review the Financial Accounting Chapter 3 and Financial Accounting Chapter 4 PowerPoints to help you further understand the chapter concepts.
- Using PowerPoint, create a presentation that explains the adjusting entry and what actions could be taken to improve financial forecasting in the future.
- Your presentation should include at least four slides and last three to five minutes. Content must include:
- Background and introduction (one slide)
- An explanation of how inventory transactions are related to cost of goods sold and how the process for recording material costs normally works. Show a typical journal entry and T-accounts in your presentation (one slide).
- An explanation of the adjusting entry that was necessary due to the inventory count and how it would affect cost of goods sold and Parsi’s forecast. Show the adjusting journal entry that occurred and the T-accounts (one slide).
- A couple of suggestions for what changes could be made to avoid this forecasting error in the future (one slide)
- Create a video of yourself making the presentation to Parsi Ominous using a screen recording software application of your choice. You can sit in front of your computer and use the built-in camera. Screencast-o-Matic offers a free version that will be more than adequate for this assignment. If there is another video software option you are more familiar with, you may use that as well.
- Your video should be both professionally formatted and professionally presented, in a manner that would be understandable to novices in accounting and finance.
- When you finish, publish your video on a website such as Vimeo, YouTube, or another public video publishing site, and submit both the link to your video and your presentation by the end of the workshop.