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. Give your opinion on the following statement and cite reasons: “Because Tercek, the vice president, is most directly responsible for the media release, Lilly has no real responsibility in this matter.”

Short answer

Lily must speak up and stop associating her name with misinformation.

Step-by-step solution

Meaning of Ratio Analysis

The comparison of a company's ratios to the industry's benchmark businesses is known as ratio analysis. Because it gives substantial insights from the financial statements, this form of financial research may be valuable to both internal management and external analysts of the organization.

Explaining the opinion of the above statement

The controller is responsible for the accuracy and clarity of financial reporting. The controller cannot let this problem slip away if the media release obscures how an accounting decision caused a clear improvement in the company's financial position. Lily should speak up and refrain from associating her name with false material.