Chapter Two - Wiley

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100 CHAPTER 2 A Further Look at Financial Statements
COMMUNICATION ACTIVITY
BYP2-9 S.B. Barrett is the chief executive officer of Tomorrow’s Products. Barrett is an
expert engineer but a novice in accounting.
Instructions
Write a letter to S.B. Barrett that explains (a) the three main types of ratios; (b) examples
of each, how they are calculated, and what they measure; and (c) the bases for comparison
in analyzing Tomorrow’s Products’ financial statements.
ETHICS CASE
BYP2-10 A May 20, 2002, Business Week story by Stanley Holmes and Mike France
entitled “Boeing’s Secret” discusses issues surrounding the timing of the disclosure of
information at the giant airplane manufacturer. To summarize, on December 11, 1996,
Boeing closed a giant deal to acquire another manufacturer, McDonnell Douglas. Boeing
paid for the acquisition by issuing shares of its own stock to the stockholders of
McDonnell Douglas. In order for the deal not to be revoked, the value of Boeing’s stock
could not decline below a certain level for a number of months after the deal.
The article suggests that during the first half of 1997 Boeing suffered significant cost
overruns because of severe inefficiencies in its production methods. Had these problems
been disclosed in the quarterly financial statements during the first and second quarter
of 1997, the company’s stock most likely would have plummeted, and the deal would have
been revoked. Company managers spent considerable time debating when the bad news
should be disclosed. One public relations manager suggested that the company’s problems
be revealed on the date of either Princess Diana’s or Mother Teresa’s funeral, in the
hope that it would be lost among those big stories that day. Instead, the company waited
until October 22 of that year to announce a $2.6 billion write-off due to cost overruns.
Within one week the company’s stock price had fallen 20%, but by this time the Mc-
Donnell Douglas deal could not be reversed.
Instructions
Answer the following questions. Although it is not required in order to answer the questions,
you may want to read the Business Week article.
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues?
(c) What assumptions or principles of accounting are relevant to this case?
(d) Do you think it is ethical to try to “time” the release of a story so as to diminish its
effect?
(e) What would you have done if you were the chief executive officer of Boeing?
(f) Boeing’s top management maintains that it did not have an obligation to reveal its
problems during the first half of 1997, and that it wouldn’t do anything differently
today. What implications does this have for investors and analysts who follow Boeing’s
stock?
Answers to Self-Study Questions
1. a 2. a 3. c 4. c 5. c 6. d 7. a 8. a 9. a 10. c 11. b
Answer to Tootsie Roll Review It Question 3, p. 62
Tootsie Roll’s largest current asset at December 31, 2002, was cash and cash equivalents,
at $105,507,000.
Remember to go back to the Navigator box on the chapter-opening page
■✓ and check off your completed work.