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Inflated Earnings Related to Channel Stuffing

Along with the other ethical dilemmas Coca-Cola was faced with, the company was accused of practicing channel stuffing. According to the textbook, Business Ethics, channel stuffing is “the practice of shipping extra inventory to wholesalers and retailers at an excessive rate, typically before the end of a quarter” (Ferrell, 2008). The use of channel stuffing is deceptive and a company utilizes it to inflate their sales and earnings figures. When a company ships out their product to a distributor, it is counted as a sale. However, when a company participates in channel stuffing, they count the sale and usually the product is returned or it remains in a warehouse. The company sends their retailers more than they can sell, falsely demonstrating that there is a high demand for the product. It can also be used to hide when the demand of a product declines.
The benefit the company would receive from channel stuffing is more earnings on their financial statements and misinforming their investors. In Coca Cola’s situation, they were accused of sending extra concentrate to Japanese bottlers from 1997 to 1999 to dishonestly inflate their profits. Even though Coca-Cola settled the accusation, the Securities and Exchange Commission concluded that channel stuffing did occur. The company then pressured bottlers into purchasing extra concentrate in return for extended credit.
Coca-Cola promised the SEC to avoid engaging in channel stuffing in the future. At this time, the company created an ethics and compliance office, who verifies each financial quarter that they have not altered the terms of payment or extended special credit. Coca-Cola agreed to try to reduce the amount of concentrate held by the international bottlers. Even though they settled the predicament with the SEC, Coca-Cola still faces a lawsuit with shareholders for channel stuffing in Japan, North America, Europe, and South Africa.
1. How did coca-cola try to deceive its investors through ” Channel Stuffing”. What were the consequences of this?

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You met a customer who was asked a lot of questions and commented on 2 points details. This customer is considered:

A. Elderly
B. Analytical
C. Non-committal
D. Angry
A(n)_____ is an identified result to strive to accomplish. Whereas_______ is the process of establishing the aims and evaluating their importance.
A. Accountability, goal
B. Goal; accountability
C. Goal setting, goal
D. Goal, goal setting
Joe is a frequent customer at Charlie Pizzeria. He is there every day on his lunch break. Lately, Joe is becoming unhappy with the service because he had to eat the last two slices of pizza on his way back to work. Joe is unhappy with the service because:
A. He has only 30 minutes lunch break
B. His favorite waitress is not there
C. Business is slow
D. They don’t respect his time
A customer who has done business with Carrefour for a number of years and who has a store credit card expects: *
A. Special discount on their first purchase if they open new account
B. Up to date display of the company’s appreciation for their business
C. His name to be recognized
D. All of the options

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Operating decisions involve choices about how a company will produce and sell products to earn revenues and make a profit.

(a). Sales revenue depends on sales volume and price per unit, which are indirectly related. An increase in price usually results in a decrease in volume.

(b). The prices a company can charge for its products depend on what customers are willing to pay based on the value of the products to them and the prices charged by competitors.

(c). If a market is highly competitive and companies in the market produce very similar products, the companies usually will compete on the basis of price. They will keep their prices low to attract customers and will depend on high sales volume to earn a profit.

(d). If a company can distinguish its products from competitors’ products by special features or qualities, it can charge a higher price and earn more per unit from customers who are willing to pay for these features or qualities.

(e). Asset turnover measures the volume of sales (in dollars) relative to a company’s investment in assets. Companies that compete using low prices require high asset turnover to earn a high profit and return on assets.

(f). Profit margin measures the amount of income a company can earn on its sales. Companies that compete using special product features use high profit margin to earn a high profit and return on assets.

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Culture Music Store had the following selected account balances on October 1.

Goods are sold with a 60-day money-back guarantee against defects. During October, the following transactions occurred.

1. The store purchased 4,000 units of inventory on credit at a total invoice cost of 32,000. The goods, which were received in October, were purchased FOB destination and the seller paid freight costs of 250.

2. During the first week of the month, 700 units were sold on credit at prices averaging 12 each.

3. A clerk noticed that 50 recordings purchased in part 1 were mislabeled. These units were returned to the vendor for full credit.

4. During the second week, a cash-only sale was held and 1,200 units sold at an average price of 10 each.

5. Customers returned a total of 53 units that had been sold in part 2. The goods were in salable condition and returned to the shelf.

6. The vendor was paid in full for the goods purchased in part 1.

7. Checks were received from customers who purchased goods in part 2. All took the 2% discount that was offered for paying within 10 days.

8. A total of 1,600 units were sold during the rest of the month at prices averaging 13. Three-quarters of the sales were on credit.

9. At month-end, management estimated that 10% of the goods sold in parts 4 and 8 would be returned as defective.

10. Also at month-end, management estimated that $344 of this period’s credit sales would be uncollectible.

Required

A. Show how each of the transactions would be entered into the accounting system assuming the firm uses the periodic FIFO inventory method.

B. Prepare an income statement for the month of October assuming that operating expenses (other than warranty expense and doubtful accounts expense) totaled 2,500 and the company’s tax rate is 35%.

C. By what amount would net income have been different if the periodic LIFO method had been used? Prepare a schedule that proves your solution.

D. By what amount would net cash flow from operating activities have been different if the periodic LIFO method has been used? Explain your solution.

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