Case 1 Conservative Recognition or Cookie Jar Reserves

In: Business and Management

Submitted By TTSSB
Words 1866
Pages 8
Case 1:

Conservative Recognition or Cookie Jar Reserves

SUMMARY OF THE FACTS
Parties Involved: Aunt Amelia – Founder of O’Brian Software, Nick’s aunt and inexperienced in accounting. Nick O’Brian – Junior Internal Auditor, recently college graduate, nephew of the Lee Marchetti – Chief Financial Officer of O’Brian Software. After recently graduating college two months prior, Nick O’Brian is hired as a Junior Internal Auditor for his Aunt Amelia’s company, O’Brian Software. O’Brian Software has been in operations for five years and is a multi-million dollar publicly traded company that provides both software and consulting services to its clients. Although this is Nick’s first position at the company, he’s been involved since the very beginning of this family venture, since family members owned the majority of the stock. Realizing “her specialty is software, not accounting “, Aunt Amelia hires Lee Machete to be Chief Financial Officer (CFO) of O’Brian Software after the firm’s initial public offering (IPO) three years ago. Nick notices a significant amount of unearned revenue the balance sheet and wonders if O’Brian Software is being overly conservative in estimating the amount of deferred income. After having a difficult understanding the firm’s methodology for revenue recognition, Nick decides to talk to Marchetti. In the meeting with Marchetti, Nick states what worries him. “Overly conservative reporting could leave the impression we’re trying to create cookie jar reserves.” Machete assures Nick that based his judgment the firms accounting practices are sound, has proper documentation, and meets the Securities Exchange Commission (SEC) requirements. Nick later meets with his Aunt Amelia to convey his concern. Since Marchetti never mentioned these concerns to her, Aunt Amelia doesn’t understand the problem. She feels confident that as long…...

Similar Documents

Kristen's Cookie Case

...Kristen’s Cookie Case Case Answers Global Operations Hult International Business School Module B, 2012-13 Suneel Udpa January 21, 2013 1. 26 minutes assuming that the system is completely empty. If we receive a call anytime at or after the Mix&Spoon stage, it'll take us 26 + additional 10 minutes. This includes 8 minutes at the Mix&Spoon stage and a 2 minute wait to finish baking the previous batch. Therefore, it would take us 36 minutes to fill a rush order. (Please refer to Table 1.0 on page 4 for details). 2. At a steady state we'd be able to produce 6 (process capacity) x 4 (hours) = 24 dozen per night. At a starting state, assuming that 1st dozen takes 26 minutes, and we move into a steady state of production, we have 4 hours or 214 minutes (out of 4 hours) left, enabling us to produce 22 dozen cookies total. 3. For each dozen, I would spend 8 minutes working on it, and my roommates would spend 4 minutes. Hence, I would spend 176 minutes per shift and my roommate would spend 88 minutes per shift (with 22 dozen at a starting state). At a starting steady state, I would spend 192 minutes and my roommate 96 minutes. 4. We can in fact offer discounts to our customers who order more than one dozen cookies due to the time we save in the Load&Bake stage of production. Since we are able to produce up to 3 batches in the Mix&Spoon stage, our calculations would be as follows: 6 minutes to Mix and an extra 2 minutes to spoon for each batch. 30% of our......

Words: 745 - Pages: 3

Case Study: Kristen’s Cookie Company

...Case Study: Kristen’s Cookie Company Key questions to answer before you launch the business: 1) How long will it take you to fill a rush order? If we consider that one order is a dozen, the flow time is 26 minutes for the first order. 2) How many orders can you fill in a night, assuming you are open four hours each night? (4 hours = 240 minutes) If we consider that one order is a dozen, it will take me: * For the first order: 26 minutes * For the second order: 20 minutes (excluding backing and mixing because 6 min can be for 3 dozens) * For the third order: 20 minutes → So, it will take 66 minutes for 3 orders. → (240 / 66)* 3 = 10 orders/ night. 3) How much of your own and your roommate’s valuable time will it take to fill each order? If we assume that we will work 4 hours (240 minutes) each night, and it takes us on average 22 minutes (26+20+20 /3) to produce a dozen. (Considering that one order is a dozen.) 4) Because your baking trays can hold exactly one dozen cookies, you produce and sell cookies by the dozen. Should you give any discount for people who order two dozen cookies, three dozen cookies, or more? If so, how much? Will it take you any longer to fill a two-dozen cookie than a one-dozen cookie order? Because producing a second and a third dozen cookies will take less time than producing the first dozen cookies (excluding the washing and mixing steps), we can give a discount for people ordering two or three......

Words: 534 - Pages: 3

Cookie Jar Reserves

...CONSERVATIVE RECOGNITION OR COOKIE JAR RESERVES Robin Turner Summary Two months after graduating from college Nick O'Brien started to work in the accounting department at his aunt's software company. While going over some financial statements Nick notices what he believes are revenue recognition issues. Since Nick believes that Lee Marchetti the Chief Financial Officer (CFO) of O'Brien Software is an honest man, he decides to have a discussion with him about what he believes are revenue recognition issues. Mr. Marchetti explains to Nick that accounting is not an exact science and that it involves a lot of judgment calls and that O'Brien Software's "deferrals and estimates are well documented and in accordance with the Securities and Exchange Commission (SEC) rules" (Conservative Recognition or Cookie Jar Reserves, Carpenter p. 3). After speaking with Mr. Marchetti, Nick decided to still speak with his aunt Amelia about his concerns. Amelia expressed to Nick that she was not very good when it came to accounting matters but she was educated when it came to recognizing revenue and that she believed being conservative was better than overstating. However, she asked Nick if he thought she should mention what he found to the audit committee. Issues/Questions One question that should be addressed surrounds why the CEO Amelia is not aware of certain financial aspects of her business. The Sarbanes-Oxley Act requires the chief executive officer (CEO) and the chief......

Words: 1271 - Pages: 6

Conservative Recognition or Cookie Jar Reserves

...Conservative Recognition or Cookie Jar Reserves? A Case Study Analysis July 5, 2013 Case Summary: Nick O’Brian has just finished his college degree and has started working for his aunt’s software company, O’Brian Software. Nick was hired as a junior auditor and has only been on the job for a couple of months. His aunt Amelia started the company as a small firm many years ago and finally went public after the company had grown tremendously. She holds the CEO position and runs the bulk of the business operations. However, Amelia O’Brian does not have a sufficient understanding of the company’s accounting procedures and therefore is not involved in the company’s accounting branch. In general the company seems to function with an air of honesty and integrity. Although the company is family owned, all of the business decisions are made with the consent of the audit committee of the board of directors. Furthermore, Lee Marchetti, the company’s CFO keeps a tight eye on all the financial activity of the company and is recognized as being a trustworthy individual who can ensure that the company’s controls are watertight. The situation is like this: While reviewing some of the company’s software revenue recognition data Nick got the feeling that the estimates were too conservative based on what the company was actually bringing in. He felt that it was possible that the company was creating “cookie jar” reserves to inflate earnings when times weren’t so good. This was......

Words: 1786 - Pages: 8

Cookie Jar Reserves

...Cookie Jar Reserves and Conservative Accounting ACCT 495 Professor Jastrzebski Fall 2013 Cookie Jar Reserves and Conservative Accounting SUMMARY O'Brian Software, a multimillion dollar software company, provides custom software systems, maintenance, support and training. Nick, a recent college graduate, just began working for the family run software company. After being hired to the firm's accounting department, Nick began to suspect unintentional and misleading revenue recognition . Nick believes his Aunt Amelia, founder and CEO, is an honest business woman and that her chosen CFO, Lee Marchetti, is also an honest man. Nick also knows that the financial statements have been reviewed and approved by the internal and external auditors and the firm's internal controls are effective. Despite these facts, Nick believes the firm has been smoothing earnings and creating inflated reserves. Most firms are usually charged with inflating earnings instead of under reporting, but both are equally illegal and unethical. After approaching Lee Marchetti with his concerns, Nick has informed his aunt, who has little accounting knowledge, of his suspected issues. Nick and Aunt Amelia are now faced with the decision as to whether or not the audit committee should be made aware of these concerns. ISSUES There are three issues at play regarding proper accounting and ethical business practices. The first issue is whether or not......

Words: 1456 - Pages: 6

Case Study on Naval Reserve

...HMCS QUEEN NAVAL RESERVE DIVISION Aaron Kaytor wrote this case for a class project in EMBA 850 solely to provide material for evaluation. Though this case is intended for class alone, the findings may be used by the organization to help provide insight into issues affecting the unit and help provide insight for a way forward. As per instructions, the first part of the case consists of background information with the later portions dedicated to solutions. The author may have disguised certain names and other identifying information to protect confidentiality. Reproduction of this material is not restricted, however, please notify the author. Course professor is Bill Bonner located at University of Regina, Regina, Saskatchewan, Canada. The intent of this short paragraph is to help give this project an Ivey case look and feel. Author: Aaron Kaytor, phone (306)737-4136, email kaytora@gmail.com Copyright © 2013, Aaron Kaytor Version (A) 2013-11-30 In a small office near the corner of a cold war era building in an area known to members as command flats, the executive officer contemplates his recommendation to the commanding officer regarding the future of HMCS QUEEN. There is much on the line, two immediate issues weigh heaviest on his mind. Number one, higher command has just announced that his unit officially is the smallest unit in Canada. Number two, there is a strategic need for a unit to open in Prince Rupert, BC and there is only enough funding......

Words: 4712 - Pages: 19

Conservative Recognition or Cookie Jar Reserves

...FOR CONSERVATIVE RECOGNITION OR COOKIE JAR RESERVES Summary: O’Brian Software is a family software firm started by Amelia O’Brian. She started the company on a very small scale many years ago, but it has grown tremendously over time. The company went public and she now holds the position of chief executive officer at the company, while managing the majority of the business operations herself. Nick, who is Amelia’s nephew and a recent graduate with an accounting degree, began working for Amelia’s company. Nick was inducted as an auditor at junior level for the company and has been working only for a few months now. Amelia O’Brian has been facing issues because she does not have a sufficient understanding of the accounting procedures used in her company and her involvement with the company’s accounting function is very limited. Overall, the company has exhibited qualities of honesty and integrity in all of its functions. Though the company is owned and managed by the O’Brian family, all the important decisions are finalized only by proper discussion and final approval of the board of directors audit committee. All financial activities and transactions in the company are run by its CFO, Lee Marchetti. He is recognized as a trustworthy executive who ensures tight internal checks and controls on company’s finances. Current situation: In the process of reviewing the company’s financial statements, Nick recognized some issues with software revenue recognition. He......

Words: 1598 - Pages: 7

Conservative Recognition

...O’Brian Software. Nick is going over the financial statements when he recognizes some questionable revenue recognition issues. Nick proceeds to address his concerns with the chief financial officer of the company, Lee Marchetti. Lee explains to Nick how revenue recognition is broken down and that a lot of information and judgment is involved. It is also pointed out that since the company went public three years ago they have consistently received ‘clean’ opinions from external auditors. Nick admits that Marchetti strikes him as a honest man with years of experience. Out of concern for his aunt’s company he approached his aunt, who is not known for her accounting expertise, but is the CEO of O’Brian Software. After explaining his concerns she asked Nick whether or not they should present this information to the audit committee. Issues/Questions The initial question is whether or not the audit committee should be made aware of Nick’s revenue recognition concerns. As President and CEO of Softrax Corporation, Robert O’Connor, points out, this is a serious claim. It is imperative that Nick does his research before making such a claim. The underlying issue in this case is if O’Brian Software is creating ‘cookie jar’ reserves by understating profits in periods of prosperity and then creating false reserves in times the company needs a boost. The smoothing of revenue recognition can mislead investors by providing them a false impression of the company’s financial standing......

Words: 8540 - Pages: 35

Cookie Jar

...debt is the fact that there was a steady bad debt charge off of 2.5% for the past three years. If the previous three years have been consistent at 2.5%, there should be no reason to anticipate the future. As for product returns, again, if the past 15 months show actual sales returns of .5% of sales, and that figure also matches industry data, there is no reason to increase it to 1%. Lastly, the product warranties are almost the same as product returns. If the company continues to experience .5% on warranty claims even after they used 1% in the previous year, I see no reason to use 1% again in 2009. All in all, John’s argument for using prior year results to predict current year financials was more persuasive than anticipating numbers. Calculate the difference between Karl’s and John’s recommended adjustments for bad debt, product returns, and warranties. Do you consider each individual difference material? Is the combination of the three amounts material? Bad Debt Calculation: (2.75-2.5)*37,500=$93.75 Product Return Calculation: (1-.5)*37,500=$187.50 Product Warranty Calculation: (1-.5)*37,500=$187.50 On an individual basis, I do not consider any of them material. In general, the size of each individual misstatement is not great enough to significantly alter the decision of the investor. On the other hand, the combination of all three misstatements would create a significant difference and it would be likely that the investor would alter their decision....

Words: 540 - Pages: 3

Microsoft - Revenue Recognition Issue

...Revenue recognition – the accounting term for determining the amount of revenues to be “booked” for purposes of calculating a firm’s earnings in a given period – is an important, complex and controversial issue. The importance of revenue recognition stems from the accountant’s approach to calculating earnings, which is to first calculate recognized (“booked”) revenues, and then deduct the accounting costs of earning those revenues (a process known as “matching costs with revenues”). Consequently, revenue recognition directly affects reported earnings and indirectly affects balance sheet numbers and several important financial ratios. Generally Accepted Accounting Principles (GAAP) includes some general revenue recognition principles as well as many specific rules for recognizing revenues in particular circumstances. Even then, there frequently is scope for interpretation and judgment by the company’s managers and auditors. For various reasons managers can be expected to have preferences for the amount of reported earnings, so when the rules provide some latitude they can be expected to exercise judgment in a fashion that reflects those preferences. In addition, when there are rules that provide explicit revenue recognition guidance, managers sometimes knowingly or unknowingly violate them. Not surprisingly, approximately 60 per cent of all accounting malfeasance involves revenue recognition issues. Revenue recognition is particularly important in the software industry,...

Words: 2489 - Pages: 10

Cookie Jar

...“Cookie Jar” Andrew D. Ross GEN/200 29Jan2014 Meagan Jones “Cookie Jar” Reflections and Thoughts on Personal Responsibility By: Andrew D. Ross Personal responsibility can also be seen as accountability, which is defined by Merriam-Webster as "the quality or state of being accountable; especially : an obligation or willingness to accept responsibility or to account for one's actions." This should mean that to be accountable for yourself, you would admit to your mistakes, make an effort to make those mistakes right, and live in a way that does not harm others whenever possible. “Personal responsibility is the willingness to both accept the importance of standards that society establishes for individual behavior and to make strenuous personal efforts to live by those standards. But personal responsibility also means that when individuals fail to meet expected standards, they do not look around for some factor outside themselves to blame. The demise of personal responsibility occurs when individuals blame their family, their peers, their economic circumstances, or their society for their own failure to meet standards. The three areas of personal decision making in which the nation’s youth and young adults most need to learn and practice personal responsibility are education, sexual behavior and marriage, and work.” Haskins, R. (2009). Brookings. Retrieved from http://www.brookings.edu/research/articles/2009/07/09-responsibility-haskins# This is just a......

Words: 801 - Pages: 4

Kristen’s Cookie Company Case Report

...Kristen’s cookie company pre-case report DSC335 1. Draw a flow chart of the cookie-making process 2. How long will it take to fill a rush order of 1-dozen cookie? It will take 26 minutes to fill a rush order of 1-dozen cookie. (I revise my chart to 4 cycle orders) 3. What is the cycle time? How many orders can you fill in a night (4-hour period)? Does your answer depend on the size of the order, 1-dozen, 2-dozen, or 3-dozen? 1-dozen orders: The cycle time is 10 minutes. The first order of 1-dozen cookies will take 26 minutes, and each 10 minutes for another 1-dozen cookie order. (4*60-26)/10=21.4 plus the first order, we can make 22 orders of 1-dozen cookie fill in a night. 2-dozen orders: The cycle time is 20 minutes. The first order of 2-dozen cookies will take 36 minutes, and each 20 minutes for another 2-dozen cookie order. (4*60-36)/20=10.2 and plus the first order, we can make 11 orders of 2-dozen cookie fill in a night. 3-dozen orders: The cycle time is 30 minutes. The first order of 3-dozen cookies will take 46 minutes, and each 30 minutes for another 3-dozen cookie order. (4*60-46)/30=6.47 and plus the first order, we can make 7 orders of 3-dozen cookie fill in a night. 4. What is the difference in labor (both you and your roommate’s time) per dozen among 1-dozen, 2-dozen, and 3-dozen orders? 1-dozen orders: Me: Wash and Mixing 6 minutes + fill the tray 2 minutes = 8 minutes +my roommate: Setting timer and putting in the oven 1......

Words: 682 - Pages: 3

Case Study Kristen's Cookie

...Case Report: Kristen's Cookie company 1. It takes 26 minutes to complete a rush order, that is, the addition of the time it takes to complete each step: 6 (wash and mix) + 2 (spoon) + 10 (load and bake) + 5 (unload and cool) + 2 (pack) + 1 (pay) = 26. Process flow diagram of the cookie-making process: Me Mixer Me Spoon and tray Roommate Oven and tray Oven and tray INPUT OUTPUT Roommate Oven and tray Tray Roommate Roommate Remarks: Since it does not consume any time, the first step, that is to take an order, is here ignored. Inventory is not kept at any time as the cookie dough is continuously being processed by the dozen to fit the bottleneck's capacity and only produce fresh cookies according to placed orders. 2. We assume the following: The minimum amount of cookies per order is one dozen cookies (the case states that the process produces “cookies by the dozen”). There are at least two trays and spoons, as the case mentions “cookie trays” and “spoons” Since the amount of time necessary to unload the oven is considered “negligeable”, it can be done during the same minute used to load the next batch. In this view, the first order takes 26 minutes but each following batch only requires an additional 10 minutes (see Gantt chart 1 attached). Capacity of resources (dozen cookies per hour): | Me | Roommate | Mixer (1) | Trays (2) | Spoons (2) | Oven (1) | Cycle time | 8mns/unit |......

Words: 844 - Pages: 4

Revenue Recognition Case

...Case 09-1 Velocity Cellular In conjunction with quarterly review procedures, the controller of Velocity Cellular Services (Velocity or the Company) provided the audit engagement team with background information about the Company’s promotion of its new prepaid phone service plan. The controller also provided the engagement team with an accounting memo discussing the Company’s new plan. MEMO To: From: Subject: Date: Audit Engagement Team Controller, Velocity Cellular Services Accounting for New Prepaid Phone Service Plan August 31, 2008 Velocity Cellular Services (Velocity or the Company) sells wireless services and products based on the Global System for Mobile Communications (GSM) standard. Under the GSM standard, each subscriber is required to have an activation card to access the network; the activation card is therefore necessary for subscribers to use their cellular phones. The activation card identifies the subscriber, provides the subscriber with a unique phone number, and only works on a specific carrier’s network (i.e., the activation card is not interchangeable with other carrier networks). The Company is planning to promote and market a prepaid phone service plan called “Power Starterpack” as part of its line of service plans to existing wireless subscribers (i.e., individuals who already own a cellular phone). Power Starterpack — Prepaid Phone Service Plan The Power Starterpack will provide each subscriber with a new activation card......

Words: 584 - Pages: 3

Jar Jar Script

...STAR WARS EPISODE II JAR JAR'S GREAT ADVENTURE Written by GEORGE LUCAS and JONATHAN HALES Lucasfilm Ltd. Second Draft, June 24, 2000 P.O. Box 2009 Pink Revisions, June 28, 2000 San Rafael, CA, USA 94912 Blue Revisions, July 3, 2000 * Green Revisions, July 5, 2000 THIS MATERIAL IS THE PROPERTY OF LUCASFILM LTD. AND IS INTENDED AND RESTRICTED SOLELY FOR USE BY LUCASFILM LTD. PERSONELL. DISTRIBUTION OR DISCLOSURE OF THIS MATERIAL TO UNAUTHORIZE PERSONS IS PROHIBITED. THE SALE, COPYING, OR REPRODUCTION OF THIS MATERIAL IN ANY FORM IS STRICTLY PROHBITED. 1 EXT. SPACE 1 A vast sea of stars serves as a backdrop for the Main Title, followed by a rollup, which crawls into infinity. There is unrest in the Galactic Senate. Several hundred solar systems under the leadership of the rebel leader, Count Dooku, have declared their intentions to secede from the Republic. This separatist movement has made it difficult for the limited number of Jedi Knights to maintain peace and order in the galaxy. Senator Amidala, the former Queen of Naboo, is returning to Coruscant to vote on the critical issue of creating an army to assist the overwhelmed Jedi. PAN UP to reveal the amber city planet of Coruscant. A yellow Naboo Fighter flies OVER CAMERA toward the planet, followed by a large Royal Cruiser and two more Fighters. 2 EXT. CORUSCANT - DAWN 2 The ships skim across the surface of the city landscape. The sun glints off the chrome hulls of the sleek Naboo spacecraft as they navigate between......

Words: 29232 - Pages: 117