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Chapter al plane for dig 43 Case 1-9 Cleveland Custom Cabinets Cleveland Custom Cabinets is a specialty cabinet man Leroy asked Sims to explain how net income could have facturer for high-end homes in the Cleveland Heights and gone from 14.2 percent of sales for the year ended December Shaker Heights. The company manufactures cabinets 31.2010, to 14 percent for March 31, 2011. Sims pointed built to the specifications of homeowners and employs 125 out that the estimated overhead cont had doubled for 2011 custom cabinet makers and installers. There are 30 admin- when compared with the actual cost for 2010. He explained istrative and sales staff members working for the company to Leroy that rent had doubled and the cost of utilities sky- James Leroy owns Cleveland Custom Cabinets. His rocketed. In addition, the custom-making machinery accounting manager is Marcus Sims Sims manages 15 wearing out more rapidly so the company repair and main accountants. The stall is responsible for keeping track of tenance costs also doubled from 2010 manufacturing costs by job and preparing internal and exter Leroy understood but wouldn't accept Sims explanation nal financial reports. The internal reports are used by man Instead, he told Sims that as the sole owner of the company. agement for decision making. The external reports are used there was no reason not to weak" the numbers on a on to support bank loan applications, time basis own the board of directors no worries there The company applies overhead to jobs based on directListen, this is a one-time deal. I won't ask you to do it again." labor hours For 2011, it estimated total overhead to be Leroy stated. Sims started to soften and asked Leroy just how $9.600,000 and 80,000 direct labor hours. The cost of direct he expected the tweaking to happen. Leroy flinched hold materials used during the first quarter of the year is 5600,000 up his hand and said "I'll leave the creative accounting to and direct labor cost is $400,000 (based on 20,000 hours you." worked) The company accounting system is old and does not provide actual overhead information unit about four Questions weeks after the close of a quarter. As a result, the applied . Do you agree with Leroy's statement that it doesn't matter overhead amount is used for quarterly reports. what the numbers look like since he is the sole owner? On April 10, 2011, Leroy came into Simeoffice to pick Even if it is true that Sims owns the board of directors, up the quarterly report. He looked at it aphast. Leroy had what should be their role in this matter? planned to take the statements to the bank the next day and 2 . Assume Sims is a CPA and holds the CMA. What are meet with the vice president to discuss a sl million expan the ethical considerations for him in deciding whether sion loan. He knew the bank would be reluctant to grant the to tweak the numbers? What should Sims do and why? Toan based on the income numbers in Exhibit 1. Assume Sims did a utilitarian analysis to help decide what to do Ivaluate the harm and benefits of altere EXHIBIT 1 tive courses of action CLEVELAND CUSTOM CABINETS 3. Assume Sims decided to reduce the estimated overhead Net Income for the Quarter Ended March 31, 2011 for the year by 50 percent. How would that change the net income for the quarter? What would it be as a percentage Sales 56.400,000 of sales? Do you think Leroy would like the result? Do Cost of goods manufactured 4.800,000 you think he will be content with the tweaking occurring Gross margin $1,600,000 just this one time? Selling and administrative expenses 1.510,000 $90.000 Net income

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