Question

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor’s motives, hesitates to suggest to Tercek that the company’s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

1. Should Lilly, the controller, remain silent? Give reasons.

Short answer

No, Lilly, the controller should not remain silent.

Step-by-step solution

Meaning of Ratio Analysis

Ratio analysis is a basic approach to assessing a company's health by examining the relationships between key financial indicators. Ratio analysis, according to many analysts, is the most important aspect of the analytical process.

Suggesting the reason

The controller should oppose the publication of the propaganda. The company's financial position has not improved, and the claim for increased efficiency is not substantiated by financial data.