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As the analyst for Guillermo Furniture Store I have reviewed the current budget and made suggestions for revisions noting the business risks involved because of proposals made. The notations made are within the code of ethics established by the business and give the most optimal forecasts possible while analyzing the changes with regard to its implementation.
Risks Associated with Sales Forecasting Due to the risks involved accurate sales forecasting limits effective budgeting. According to the Horngren text, a sales forecast is a prediction of sales under a given set of conditions (Horngren, et al. 2008 p.303). Sales forecasting is created by various techniques and opinions of sales teams and management that predict their individual or group sales outcomes from various sales targets. They have to consider many factors such as past patterns of sales, advertising, product research, economic conditions, competitors' actions, products and product prices which all can fluctuate and be difficult to predict because of the sales environment. Sales forecasting is difficult because of its complexity and the rapid changes in the business environment in which most companies operate (Horngren, et al. 2008 p. 303). Ethics Determining Budget Used Using budgets and performance reports, Guillermo could make a better decision based on what would be more profitable to him and his company (University of Phoenix 2008). He should have some reports stating what his past profits were, and what they are now, after the movement of the competition. If he could estimate what future profits could be, by becoming more of a distributor rather than a manufacturer, then he might be able to make an educated guess on what to do, what will bring in more profits for him and the company (University of Phoenix 2008). Since Guillermo falls into the ma and pa category of businesses, because of larger corporate competition becoming a real threat, they need to use every possible opportunity that is available to them at this time (University of Phoenix 2008). The best way to start is from within the company, understanding what is being spent and on what. Making a budget and sticking to it so the business has a chance at succeeding in this new market. Having a budget and not following it forces competition within the business, Guillermo needs to make better decisions about how much to spend (University of Phoenix 2008).
Ethics are an important part of Guillermo's decision when running his company, and keeping a budget (University of Phoenix 2008). With the new competition added to his market share he will need to make changes to his company along with his new budget. The Organizations' Code of Ethics' Analysis Ethics is a branch of philosophy that studies the difference between right and wrong. While making accounting decisions, Guillermo will face ethical dilemmas with many issues at several levels (University of Phoenix, 2008). If Guillermo chooses to use a computer controlled lathe, he will have to layoff laborers (University of Phoenix, 2008). The requirement of labor will decrease. Ethically, is it right to replace people, who need the jobs, with a machine? Another ethical dilemma Guillermo faces if he chooses to use a computer controlled lathe, is that he must show expected income and cost (University of Phoenix, 2008). Guillermo may be tempted to overestimate the expected income so his book of accounts looks good. On the other hand, if Guillermo underestimates the expected income, he will have to pay taxes (Horngren, et al. 2008 p. 300). Many accounting related issues will be in place while preparing this information; he should not inflate income, understate debt, and show lower income for tax evasion, to name several difficulties (Horngren, et al. 2008 p. 301). He may be tempted to understate the debt, as higher debt is capital structure, which is not favorable and it increases the Debt-to-Equity ratio (Horngren, et al. 2008 p.225). He should follow ethical accounting practices. Conclusion The completed assessment weighs the issues Guillermo will face as he moves toward the future. The flexible budget will permit the timely evaluation of the variables presented overall and for the day to day operational peaks and troughs. The risks can be less severe if the changes would be introduced on a trial basis. However, the computer controlled lathe, even though expensive, could offset the price of the equipment purchased by the output given by use of the lathe. I would suggest that the ethical approach to the employees be of consideration and make allowances for a re - training program wherever possible as the company moves forward. I would also suggest the most skilled craftsman be used to design the high - end products. If the Guillermo Furniture store is to continue the procedure for the stain and fire resistant applications to the finished products this could be done by the employees already there for a quicker turn - around of the product. The furniture would not be of lesser value and the profits from the patented product can still be used. The remaining employees can assist with the distribution of the furniture because of the increased production and profits (University of Phoenix 2008). In order to continue to be profitable, a plan of action must be made.
Guillermo needs to decide which of three options the best is for his company's future. Guillermo can use a budget and performance reports to discover which of the options would be the most profitable. Guillermo also needs to be sure to be honest in his accounting so his decision is not just the most profitable but it is also the right thing to do. The most relevant information for Guillermo to consider is his earning before taxes. Budget and performance reports can be used in decision making in various ways. Here Guillermo has to decide which option is good for them, manufacturing computer controlled laser lathe (high tech method), representing manufacturer in Norway or selling coated furniture (current method). Budget If there are various options to choose from, the option which has potential to generate maximum profit is selected. Budget helps the company in estimating the expected revenue and expenditure and hence the profit from a particular option. Guillermo can use Budget and Performance report for decision making as follows: Guillermo can project labor hour required, product cost and expected revenue. This information can be obtained from budget. This will help them in assessing profitability. In case of all three options available to Guillermo, he can assess the net revenue he can expect and decide which option will be more fruitful for them. Performance reports A project which is expected to maximum profit is not necessarily the best option. It depends on the risk involved, cost involved and other factors also. Performance report helps the company in comparing the options on various parameters. In case of Guillermo, the income information provides comparative figures of expected profit from three options. If Guillermo decides to sell coated furniture, PBT will be $46,118, if computer controlled laser lathe is used, income would be $213,174 and if he decides to be a representative of Norway's manufacturer, net income will be $65,041. Looking at the figures one can say that using computer controlled lathe to manufacturer is the best option. But this option requires an investment and Guillermo should consider the investment involved (and the interest to be paid on the loan to fund the investment) before taking decision. Becoming representative of the manufacturer based in Norway generates less profit but it involves no production cost. Performance report helps in comparing various options.
Ethics influence accounting decision
Being ethical is much more than being legal. Sometimes doing nothing can also be unethical. Ethics can be seen as being honest and straightforward in dealing. While taking accounting decision, Guillermo will face ethical dilemma at many issues. If he chooses to use computer controlled lathe, he will have to lay off labors as requirement of labor will come down. There are many accounting related issues like while preparing account, he should not inflate income, understate debt, show lower income for tax evasion etc. He may be tempted to understate the debt (mortgage note payable) as higher debt in capital structure is not favorable and it increases the Debt-to-Equity ratio). Also, if he chooses to use computer controlled lathe, he has to show expected income and cost. He may be tempted to overestimate the income so that his book of account looks good. He may underestimate the income so that he has to pay tax. He should follow ethical accounting practice. It may happen that even if he is not following ethical accounting practice, he is not breaking law, but, eventually it will get itself into trouble.
Making decisions The most relevant accounting information for Guillermo will be EBT (Earning before taxes). If Guillermo chooses to go for computer controlled lathe, he will have to make additional investment. He will charge depreciation on the investment so, he will have to pay lower tax. This will increase the net profit. Similarly, in case of becoming representative of Norway's manufacturer, he has to make additional investment and hence he will charge depreciation which will save taxes. So, earning before tax is more relevant than net profit. However, additional investment and WACC should also be considered to know the actual cost of the investment. He has to see that additional income is more than the cost of capital to fund the additional investment requirement.
How the Guillermo Furniture Store operates is important in determining how the decision making prerogatives are set. If the company is going to operate on an ethical accounting level, then the company will not overstate or underestimate the costs of the products. While this may help the company in setting up its debt-to-income ratio, it does not provide the correct outlook. Guillermo is reviewing how the budget is currently written. As the analyst, it was determined that several factors affecting the business are also affecting the cost-relationships. If the variables change significantly, then the cost will also change. Thus, it is important for Guillermo to forecast as accurately as possible, utilizing data from the last three years if possible. By looking at the fluctuating market over the last three years, Guillermo would be able to average out what has occurred, using that as a beginning measure for the budget. Guillermo is indeed going to behave in an ethical manner. As such, the company will review the cost-relationships over the last three years. By reviewing the cost of the materials, the amount of items purchased, the cost of employees (including benefits) as well as all other overhead costs, Guillermo will then be able to adequately forecast the new budget. In most companies, cost-relationships and behaviors of the company are based upon how the company is set up, the mission statement of the company as well as the ethics and values of the company. Guillermo is known for its honesty and integrity. Thus, the behaviors of the company ensure that the company will not overstate or underestimate the budget to make the company look better. The cost-relationships will be evaluated accurately in order to allow for the budget to be accurately forecasted. The managers will need to set, as their priority goals, the method to determine the control system which will assist them in meeting the goals. The prerogatives the managers will focus on will be to evaluate the costs of goods sold, as well as overhead costs, to identify the cost-relationship for the materials and to accurately forecast the budget.
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