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A health problem, especially in emerging nations, is that the food available to people often contains toxins or poisons. Suppose that a person consumes a dose of a certain toxin every day and that the proportion of accumulated toxin excreted by the person's body each day is . (For example, if , then of the accumulated toxin is excreted each day.) Find an expression for the total amount of toxin that will eventually accumulate in the person’s body.
Hatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due-diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.
Several unique circumstances at Hatfield are discovered by the SEC due-diligence team during the course of the investigation:
Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have accused Hatfield’s management of manipulating the company’s financial statements to justify not granting any concessions during the course of negotiations.
All new equipment obtained over the past several years has been established on Hatfield’s books as operating leases, although past acquisitions of similar equipment were nearly always classified as capital leases. Financial statements of industry peers indicate that capital leases for this type of equipment are the norm. The SEC wants Hatfield’s management to provide justification for this apparent deviation from “normal” accounting practices.
Inventory on Hatfield’s books has been steadily increasing for the past few years in comparison to sales growth. Management credits improved operating efficiencies in its production methods that have contributed to boosts in overall production. The SEC is seeking evidence that Hatfield somehow may have manipulated its inventory accounts.
The SEC due-diligence team is not necessarily searching for evidence of fraud but of possible manipulation of accounting standards for the purpose of misleading shareholders and other interested parties. Initial review of Hatfield’s financial statements indicates that, at a minimum, certain practices have resulted in low-quality earnings.
Hatfield has begun recording all new equipment leases on its books as operating leases, a change from its consistent past use of capital leases, in which the present value of lease payments is classified as a debt obligation. What is the most likely motivation behind Hatfield’s change in accounting methodology? Hatfield is attempting to:
a. Improve its leverage ratios and reduce its perceived leverage.
b. Reduce its cost of goods sold and increase it profitability.
c. Increase its operating margins relative to industry peers.