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- QUESTION
APA guidelines
Read Case Study 13-1 "Accounting for Contingent Assets: The Case of Cardinal Health," from Chapter 13 in the textbook.In a 250-500 word executive summary to the Cardinal Health CEO, address the following.
Explain the justification that could be given for deducting the expected litigation gain from cost of good sold and explain why Cardinal Health chose this alternative rather than reporting it as a nonoperating item.
Explain what the senior Cardinal Health executive meant when he said, "We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3." Include specific clarification of the phrase "not steal from Q3."
Explain specifically what Cardinal Health did to get into trouble with the SEC.
Justify the timing of the $10 million and $12 million gains, and explain how Cardinal Health's senior managers defend these decisions.
Cardinal Health received more than $22 million from the litigation settlement. Discuss whether the actions of Cardinal Health senior managers were so wrong that they justify the actions of the SEC. Classify Cardinal Health's behavior on a scale from 1-10, with 1 being "relatively harmless" and 10 being "downright fraudulent." Justify your rating.
| Subject | Nursing | Pages | 3 | Style | APA |
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Answer
Cardinal Heath deducted the expected litigation gain from cost of goods essentially treating it as an operating item in order to boost their operating earnings. According to Nishikawa, Kamiya and Kawanishi (2016), operating income refers to income business organizations make from their core operations. The company could use the logic that the money was compensation from unfair business practices by vitamin makers which affected their core business of distributing pharmaceutical drugs. Cardinal health chose to treat the litigation gains this way in order to close their budgetary gap by increasing their operations earnings thus appealing to shareholders.
The statement “We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3” (Young, Cohen & Bens, 2018). Means the company did not need a lot of money to cover their budgetary shortfall for financial year 2001. Therefore, if they treated the $ 10 million as operating income, they would cover the shortfall they had. The reference to “Steal from Q3” means they did not want to take money budgeted for the third quarter to cover the shortfall they were experiencing in the second quarter.
Cardinal Health got into trouble with the Securities and Exchange Commission (SEC) through the way they handled their accounting for contingent assets. According to Engerstam and Muyingo (2019), lawsuit settlement are not classified as operating income yet the company decided to treat potential income from a law suit as an operating income by deducting from their cost of goods. The management defended their actions by arguing that the provisional value used was far much low that of the actual settlement the company later received.
On a scale of 1 to 10, I give the company a 10. Their actions were downright fraudulent. They counted their money before they received it. A court case could go either way; additionally, they could also have won the case but the settlement amount given could have been far much less what they anticipated. I therefore concur with the actions of the SEC for fining the company to deter other companies from flaunting accounting rules in order to solve their problems and deceive shareholders.
References
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Engerstam, S., & Muyingo, H. G. (2019). Redefining Net Operating Income in a shared economy environment (No. eres2019_358). European Real Estate Society (ERES). Nishikawa, I., Kamiya, T., & Kawanishi, Y. (2016). The definitions of net income and comprehensive income and their implications for measurement. Accounting Horizons, 30(4), 511-516. Young, S. D., Cohen, J., & Bens, D. A. (2018). Corporate Financial Reporting and Analysis: A Global Perspective. John Wiley & Sons.
Appendix
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