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. What stakeholders might be affected by Tercek’s media release?

Short answer

Tercek's media release could push the stock price up.

Step-by-step solution

Meaning of Ratio Analysis

Ratio analysis is a tool used by business entities to analyze financial reports for the purpose of determining profitability, efficiency, financial leverage. It focuses on the process to provide useful information for the decision-making process.

Explaining the effects of Tercek's media release to stakeholders

The positive press announcement strengthens the present stockholders' position while also improving management's image. Such publicity might lead to a rise in the stock price. Because the media release portrays a deceptive view of the company's financial state, future investors and stockholders would be affected.