Essay 1 - Ethical Dilemma

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-2 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Amy Kimbell was recently hired as an accounting manager for Hi-Quality, Inc., a publicly
held company producing components for the automotive industry. One division, Alpha,
uses a highly automated process that had been outsourced for a number of years
because the capital investment required was high and the technology was constantly
changing. Two years ago, the company decided to make the necessary capital
investment and bring the operation in house. Because all major capital investments
must be approved by the Board of Directors, the budget committee for the Alpha
Division recommended the $4 million investment to the Board, projecting a significant
cost savings.
In her new job as accounting manager, Kimbell is on the budget committee for the
Alpha Division. The Board has requested from the committee a post-audit review of the
actual cost savings. While working on the review, Kimbell noted that several of the
projections in the original proposal were very aggressive, including an unusually high
salvage value and an excessively long useful life. If more realistic projections had been
used, Kimbell doubts that the Board would have approved the investment.
When Kimbell expressed her concerns at the next meeting of Alpha’s budget
committee, she was told that it had been the unanimous decision of the committee to
recommend the investment because it was thought to be in the best long-term interest
of the company. According to the committee members, the post-audit report would not
discuss these issues; the committee members believe that certain adjustments to the
review are justified to ensure the success of the Alpha division and the company as a
whole.
A. Using the categories outlined in the IMA Statement of Ethical
Professional Practice, identify the standards that are specifically
relevant to Kimbell’s ethical conflict and explain why the identified
standards are applicable to the situation.

A. According to the IMA Statement of Ethical Professional Practice, what

specific actions should Kimbell take to resolve her ethical dilemma?
Essay 2 - Ethics and Whistleblowing

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Alex Raminov is a management accountant at Carroll Mining and Manufacturing

Company (CMMC), a large processor of ores and minerals. While working late one
night to complete the notes for the financial statements, Raminov was looking for a file
in his supervisor’s office and noticed a report regarding procedures for disposing of
plant wastes. According to handwritten notes on the face of the report, CMMC had been
using a residential landfill in a nearby township to dump toxic coal-cleaning fluid wastes
over a considerable period of time. The report stated that locating a new dump site was
urgent because the current one was nearing capacity.
Raminov realized that it was possible CMMC had been improperly disposing of highly
toxic fluids in a landfill that was restricted to residential refuse. Besides the obvious
hazards to residents of the area, legal problems could result if and when the authorities
are notified. The financial consequences of clean-up actions, as well as the loss of
CMMC’s generally good environmental reputation, could be catastrophic for the
company.
Raminov asked his supervisor how this item was to be included in the notes and
inquired whether an accrual for clean-up costs was anticipated. His supervisor told him
to “forget about this matter“ and that he had no intention of mentioning one word about
waste disposal in this year’s financial statements.

A. Using the categories outlined in the IMA Statement of Ethical

Professional Practice, identify the standards that are specifically
relevant to Alex Raminov’s ethical conflict and explain why the
standards are applicable to the situation.
A. According to the IMA Statement of Ethical Professional Practice, what
further steps, if any, should Raminov take in resolving his ethical
dilemma?

A. If he continues to be rebuffed by his employer, should Raminov notify

the appropriate authorities? Should he anonymously release the
information to the local newspaper? Explain your answers.
Essay 3 - Ethics and Discovery of Illegal Acts

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Adam Blackbird was recently hired as assistant controller of GroChem, Inc., which
processes chemicals for use in fertilizers. Blackbird was selected for this position
because of his past experience in the chemical processing field. During his first
month on the job, Blackbird made a point of getting to know the people responsible
for the plant operations and learning how things are done at GroChem.
During a conversation with the plant supervisor, Blackbird asked about the company
procedures for handling toxic waste materials. The plant supervisor replied that he
was not involved with the disposal of wastes and suggested that Blackbird might be
wise to ignore this issue. This response strengthened Blackbird’s determination to
investigate further to ensure that the company was not vulnerable to litigation.
Upon further investigation, Blackbird discovered evidence that GroChem was using a
nearby residential landfill to dump toxic wastes. It appeared that some members of
GroChem’s management team were aware of this situation and may have been
involved in arranging for this dumping. However, Blackbird was unable to determine
whether his superior, the controller, was involved.
Uncertain how he should proceed, Blackbird began to consider his options by
outlining the following three alternative courses of action:

• Seek the advice of his superior, the controller.

• Anonymously release the information to the local newspaper.
• Discuss the situation with an outside member of the board of directors with whom
he is acquainted.
A. Discuss why Adam Blackbird has an ethical responsibility to take some
action in the matter of GroChem, Inc., and the dumping of toxic wastes.
Refer to the specific standards (competence, confidentiality, integrity,
and credibility) in the IMA Statement of Ethical Professional Practice to
support your answer.

A. For each of the three alternative courses of action that Adam Blackbird
has outlined, explain whether the action is appropriate. Use the IMA
Statement of Ethical Professional Practice to support your answer.

A. Without prejudice to your answer in any other question, assume that

Adam Blackbird sought the advice of his superior, the controller, and
discovered that the controller was involved in the dumping of toxic
wastes. Using the IMA Statement of Ethical Professional Practice to
support your answer, describe the steps that Blackbird should take to
resolve this situation.
Essay 4 - Ethics and Pressure from Superiors

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-4 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

The Fore Corporation is an integrated food processing company that has operations in
over two dozen countries. Fore’s corporate headquarters is in Chicago, and the
company’s executives frequently travel to visit Fore’s foreign and domestic facilities.
Fore has a fleet of aircraft that consists of two business jets with international range and
six smaller aircraft used on shorter flights. Company policy is to assign aircraft to trips
on the basis of minimizing cost, but the practice is to assign the aircraft based on the
organizational rank of the traveler. Fore offers its aircraft for short-term lease or charter
by other organizations whenever Fore itself does not plan to use the aircraft. Fore
surveys the market often to keep its lease and charter rates competitive.
William Earle, Fore’s Vice President of Finance, has claimed that a third business jet
can be justified financially. However, some people in the Controller’s office have
surmised that the real reason for a third business jet is to upgrade the aircraft used by
Earle. Presently, the people outranking Earle keep the two business jets busy, leaving
Earle to usually fly in smaller turbine aircraft.
The third business jet would cost $11 million. A capital expenditure of this size requires
a proposal with projected cash flows and net present value computations. If Fore’s
President and the Finance Committee of the Board of Directors approve the proposal, it
will be submitted to the full Board of Directors. The Board has final approval on capital
expenditures exceeding $5 million and has established a firm policy of rejecting any
discretionary proposal that has a negative net present value. Earle asked Rachel Arnett,
Assistant Corporate Controller, to prepare a proposal on a third business jet. Arnett
gathered the following data:
• Acquisition cost of the aircraft, including instrumentation and interior furnishing
• Operating cost of the aircraft for company use
• Projected avoidable commercial airfare and other avoidable costs from company
use of the plane
• Projected value of executive time saved by using the third business jet
 • Projected contribution margin from incremental lease and charter activity
• Estimated resale value of the aircraft
• Estimated income tax effects of the proposal
When Earle reviewed Arnett’s completed proposal and saw the large negative net
present value, he returned the proposal to Arnett. With a glare, Earle commented, “You
must have made an error. The proposal should look better than that.” Feeling some
pressure, Arnett checked her computations; she found no errors. However, Earle’s
message was clear. Arnett discarded her projections that she believed were reasonable
and replaced them with amounts that had a remote chance of actually occurring but
were more favorable to the proposal. For example, she used first-class airfares to
recalculate the avoidable commercial airfare costs even though company policy was to
fly coach. She found revising the proposal to be distressing.
The revised proposal still had a negative net present value. Earle’s anger was evident
as he told Arnett to revise the proposal again and to start with a $100,000 positive net
present value and work backwards to compute supporting estimates and projections.

A. Explain whether Rachel Arnett’s revision of the proposal was in violation

of the IMA Statement of Ethical Professional Practice.

A. Was William Earle in violation of the IMA Statement of Ethical

Professional Practice by telling Arnett specifically how to revise the
proposal? Explain your answer.

A. What elements of the projection and estimation process would be

compromised in preparing an analysis for which a preconceived result is
sought?

A. Identify specific internal controls that Fore Corporation could implement

to prevent unethical behavior on the part of the Vice President of
Finance.
Essay 5 - Ethical Dilemma and Resolution

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-2 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

CenturySound, Inc., produces cutting edge high-end audio systems that are sold
primarily through major retailers. Any production overruns are sold to discount retailers
under CenturySound’s private label SoundDynamX. The discount retail segment
appears very profitable because the basic operating budget assigns all fixed expenses
to production for the major retailers, the only predictable market.
Several years ago, CenturySound implemented a 100% testing program. On average
approximately 3% of production is found to be substandard and unacceptable. Of this
3%, approximately 2/3 are reworked and the remaining 1/3 are scrapped. However, in a
recent analysis of customer complaints, George Wilson, the Cost Accountant, and Barry
Ross, the Quality Control Engineer, have ascertained that normal rework does not bring
the audio systems up to standard. Sampling shows that about 25% of the reworked
audio systems will fail after extended operation within 1 year.
Unfortunately, there is no way to determine which reworked audio systems will fail
because testing will not detect this problem. CenturySound’s marketing analyst has
indicated that this problem will have a significant effect on the company’s reputation and
customer satisfaction if the problem is not corrected. Consequently, the Board of
Directors would interpret this problem as having serious negative implications for the
company’s profitability.
Wilson has included the audio system failure and rework problem in his written report
that has been prepared for the upcoming quarterly meeting of the Board of Directors.
Due to the potential adverse economic effect, Wilson has followed a long standing
practice of highlighting this information.
After reviewing the reports to be presented, the Plant Manager was upset and said to
the Controller, “We can’t trouble the Board with this kind of material. Tell Wilson to tone
that down. People cannot expect their systems to last forever.”
The Controller called Wilson into his office and said, “George, you’ll have to bury this
one. The probable failure of reworks can be referred to briefly in the oral presentation,
but it should not be mentioned or highlighted in the advance material mailed to the
Board.”
Wilson feels strongly that the Board will be misinformed on a potentially serious loss of
income if he follows the Controller’s orders. Wilson discussed the problem with Ross,
the Quality Control Engineer, who simply remarked, “That’s your problem, George.”

A. Identify and discuss the ethical considerations that George Wilson

should recognize in deciding how to proceed in this matter. Support
your answer by referring to the specific standards outlined in the IMA
Statement of Ethical Professional Practice.

A. According to the IMA Statement of Ethical Professional Practice, what

are the steps Wilson should take to resolve the situation?
Essay 6 - Ethical Dilemma and Resolution

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-2 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

GRQ Company is a privately held entity that refines a variety of natural raw materials
used as primary inputs for the steel industry. The firm has done well over the last
several years, and most members of senior management have received bonuses well in
excess of 60% of their base salaries. Also, both the CFO and the CEO have earned
bonuses in excess of 100% of their base salaries. GRQ has projected this trend of
successful earnings and bonuses to continue.
All-American Steel Company (AAS) has tendered a very generous offer to acquire
GRQ. At the same time, several top GRQ executives who own over 40% of GRQ’s
stock have learned that the primary supplier of their major raw material will not renew
their contract at the end of the current fiscal year. GRQ has no other vendors available
within the United States to competitively provide this raw material in the magnitude
needed to support their continued record of profitable operations.
As part of the due diligence process, an analyst with AAS has asked John Spencer,
controller of GRQ, if he knows of any material event that will affect earnings over the
next several years. Spencer, who also participates in the bonus program, is aware that
GRQ’s primary supplier will no longer provide raw materials to the firm beyond the end
of the current fiscal year. He spoke with Bob Green, the CFO of GRQ, telling him that
while the profit projections for the remainder of the current year will match the earnings
of prior years, it is obvious that projected earnings for the next year will be greatly
reduced. Green informed Spencer that the executive committee had met and decided
that only members of top management were to be made aware of the situation with their
key supplier. Accordingly, Spencer should not inform AAS of the situation with the
supplier.
A. Referring to the specific standards outlined in the IMA Statement of
Ethical Professional Practice, identify and discuss Spencer’s ethical
obligations.

A. According to the IMA Statement of Ethical Professional Practice, identify

the steps that Spencer should take to resolve the ethical issue.
Essay 7 - Ethical Dilemma

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-2 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

SieCo is a sheet metal manufacturer whose customers are mainly in the automobile
industry. The company’s chief engineer, Steve Simpson, has recently presented a
proposal for automating the Drilling Department. The proposal recommended that
SieCo purchase from Service Corp. two robots that would have the capability of
replacing the eight direct labor workers in the department. The cost savings in the
proposal included the elimination of the direct labor costs plus the elimination of
manufacturing overhead cost in the Drilling Department, as SieCo charges
manufacturing overhead on the basis of direct labor costs using a plant-wide rate.
SieCo’s controller, Keith Hunter, gathered the information shown below in Exhibit 1 to
discuss the issue of overhead application at the management meeting at which the
proposal was approved.

Exhibit 1
Average Annual
Average Annual Direct Manufacturing Overhead Average Manufacturing
Date Labor Cost Cost Overhead Rate
Current
$4,000,000 $20,000,000 500%
Year
Cutting Grinding Drilling
Category Department Department Department
Average Annual Direct Labor $ 2,000,000 $1,750,000 $ 250,000
Average Annual Overhead Cost 11,000,000 7,000,000 2,000,000
Simpson met the chief accountant, Leslie Altman, in the lunchroom and inquired about
the status of the proposal. Altman told Simpson that the project had been approved.
Simpson said, “That’s great; be sure to make the payment as soon as possible as my
brother-in-law owns Service Corp.”
Altman was puzzled by the fact that there had been no competitive bidding and spoke to
her supervisor, Keith Hunter. Hunter told Altman not to worry; Service Corp will do a
great job.

A. According to the IMA Statement of Ethical Professional Practice, identify

the steps that Altman should take to resolve this situation.

A. Referring to the specific standards outlined in IMA’s Statement of

Ethical Professional Practice, identify and discuss the ethical conflicts
that Altman needs to resolve.
Essay 8 - Fraud at a Construction Site

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-5 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

A vertically integrated manufacturing company located in the United States acquired its
materials from locations throughout the world. Recently, it acquired rights to resources
at a distant Canadian location. As construction of a large concrete and steel building
was beginning in a remote area of northern Canada, the project and office managers,
longtime employees of the firm, initiated a series of schemes to defraud the company.
They began modestly by twice submitting a charge card receipt for reimbursement.
First, they submitted the original. The next month, they put its copy in the batch for
reimbursement. The managers also hired a trucker, who was paid by the company’s
petty cash fund, to clear logs from the job site. The trees were sold to a local lumber
company for cash, which the managers pocketed. A supervisor at the home office then
questioned whether the logs had been sold for their timber value. The manager
responded that the logs were unsalable because they had been growing on the ocean
shore and were too salty to be usable.
On another occasion, the office manager charged expensive car batteries from a local
service station for use in personal vehicles. The charge slip was submitted for
reimbursement from the petty cash fund. Another example was a charge to the
company by the project manager for several hundred dollars of sheetrock used in a
home remodeling project. To save the cost of disposal, the manager brought the
sheetrock scraps back to the construction site dumpster.
The fraud with the largest loss potential consisted of kickbacks to the managers from a
concrete vendor. By threatening loss of the contract with the construction firm, the
managers forced the vendor to charge for seven loads of cement for each delivery of
six. This arrangement was to continue for the remainder of the project. The value of the
extra load was to be paid by the contractor to the two managers.
A. What internal controls should be implemented to prevent these frauds?

A. How does collusion affect these frauds?

A. What are some fraud risk factors (red flags) that might indicate to
management or internal auditors that a fraud was being perpetrated at
the construction site?

A. How might an auditor uncover the fraud if the auditor went to the site?

A. Explain the fraud triangle and its use in this situation.

Essay 9 - Fraud Symptoms

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-4 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

An organization’s Director of Maintenance has sole custody of company vehicles and

related replacement parts. The director’s spouse is in charge of the inventory control
section of the controller’s office. Both individuals come from families that had low to
moderate incomes and have risen rapidly in the organization. The two are highly
regarded by nearly everyone in the company. They are generous, and their peers have
come to expect nice presents for special occasions, such as birthdays and
anniversaries. Both are tireless workers. They are often the last to leave work at night
and the first to arrive in the morning. When they work late, they often allow the security
guards to leave early.
To some, however, their lifestyle is paradoxical. They adhere to their conservative roots
and have saved enough to purchase a light, twin-engine airplane, an 80-acre farm, and
nice cars for their teenage children. But they also have spendthrift tendencies. They
often fly their airplane the 1,000 miles from their home to a resort for gambling
weekends. Friends who have accompanied them report that they seldom win.
Management views these trips as justifiable rewards for their hard work. They are so
busy taking care of the organization’s interests that they never have time to take the two
weeks’ vacation they earn each year.

A. Explain the meaning of fraud risk factors or red flags.

A. List six indicators of potential fraud that might lead management or an

auditor to suspect fraud in the scenario.
A. Describe six detailed audit steps that should be used to determine
whether fraud is being perpetrated.

A. Explain the effects of this scenario on the fraud triangle.

Essay 10 - Elements of Fraud

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-4 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Contrary to standard practice, a bank loan officer charged certain customers a 1%

origination fee on commercial loans. The fee was to be paid by check payable to the
bank. The fee was shown on the customer’s, not on the bank’s, copy of the loan
documentation.
The loan officer would then take the customer’s check to a teller and state that the
customer wanted a cashier’s check for the same amount made payable to a certain
company. The loan officer subsequently deposited the cashier’s check in an account
established for the fictitious company at another bank. Funds were later transferred
back to the loan officer’s personal account at his employer’s bank.

A. Identify four elements of a legal definition of fraud.

A. Describe the aspects of fraud present in this case that correspond to the
elements of fraud.

A. Describe three factors that allowed this fraud to occur.

A. Identify two audit procedures that would have disclosed this fraud.
Essay 11 - Outsourcing Janitorial Service

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-4 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Your company has recently signed an agreement with a janitorial service company. It
will provide all janitorial-type services, including sweeping floors, hauling trash, washing
windows, stocking the restrooms, and providing minor repairs. You are to be billed at an
hourly rate based on the type of service performed. The work of common laborers
(sweeping, hauling trash) is to be billed at $18 per hour. More skilled (repairs) and more
dangerous work (washing outside windows on the 23rd floor) is to be billed at $28 per
hour. Supervisory time is to be billed at $30 per hour. The janitorial service company will
submit monthly invoices that show the number and types of hours for which your
company is being charged.
The contract is very simple. In fact, all of the pertinent aspects of the contract are
mentioned in the above paragraph.

A. State the legal definition of fraud.

A. What internal control problems do you foresee as a result of the

janitorial service contract?
A. What recommendations would you make after reviewing the contract?

A. Explain the fraud triangle and how it can be helpful in assessing this
contract.
Essay 12 - Fraud Controls

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-4 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

An auditor discovered that a supervisor at one of the auditor’s locations removes excess
cash and resets sales totals throughout the day on the point-of-sale (POS) system. At
closing, the supervisor deposits cash equal to the recorded sales on the POS system
and keeps the rest.
The supervisor forwards the close-of-day POS reports from the POS system along with
a copy of the bank deposit slip to the company’s revenue accounting department. The
revenue accounting department records the sales and the cash for the location in the
general ledger and vouches the deposit slip to the bank statement. Any differences
between sales and deposits are recorded in an over/short account and, if necessary,
followed up with the location supervisor. The customer food order checks are serially
numbered, and it is the supervisor’s responsibility to see that they are accounted for at
the end of each day. Customer checks and the transaction journal tapes from the POS
system are kept by the supervisor for 1 week at the location and then destroyed.
The auditor also noted that the accounts receivable department is separate from other
accounting activities. Credit is approved by a separate credit department. Control
accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged
monthly. The accounts receivable manager writes off delinquent accounts after 1 year,
or sooner if a bankruptcy or other unusual circumstances are involved. Credit
memoranda are prenumbered and must correlate with receiving reports.

A. Which control allowed the fraud by the supervisor to occur?

A. Would the supervisor’s fraud have been detected by examining controls
over the verification of bank deposits, comparing the POS reports with
deposit slips, or verifying that food checks are accounted for?

A. Which audit procedure would have detected the fraud?

A. What is the internal control deficiency in the accounts receivable

department?
Essay 13 - Fraudulent Financial Reporting and Misappropriation of Assets

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

From an auditor’s perspective, fraud is an intentional act by one or more individuals involving
deception that results in material misstatement of audited financial statements. The types of
fraud relevant to an auditor are fraudulent financial reporting and misappropriation of assets.

A. Explain the differences between fraudulent financial reporting and

misappropriation of assets, the likely perpetrators of each, and their
effects. Also, which is of most concern to an auditor?

A. Managers and auditors often study red flags. List 10 red flags that might
indicate the possibility of fraudulent financial reporting.

A. List 10 red flags that might indicate the possibility of misappropriation of

assets.
Essay 14 - Capital Budgeting and Ethics

This study unit contains 14 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-7 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Charlene Roberts is the controller for PARKCO, a company that owns and operates
several parking garages in a large Midwestern American city. Recently, the
management of PARKCO has been investigating the viability of building a parking
garage in an area of the city that has experienced rapid growth. Some years ago,
PARKCO acquired the necessary land at a cost of $425,000 and had demolished
worthless buildings on the land at a cost of $72,000. Since then, the land has been
rented by various construction companies as a temporary storage site for building
materials while the construction companies completed projects in the area. PARKCO
has averaged revenue of $5,000 per year for this use of the property.

Roberts is currently assembling financial information relating to the proposed garage. In

addition to the information already presented, she received from the CFO, John
Demming, the following projections:

Number of parking spaces in the proposed garage 840

Number of parking spaces rented at the monthly rate 420

Average number of parkers paying the daily rate (for each of the 20 business days per
month) 180

Fixed costs to operate the garage per month $30,000

Roberts estimates the monthly variable cost of servicing each monthly parker is $12,
and that the price of a monthly parking space would be $75. The estimated cost per
daily parker is $2, and the daily parking rate is expected to be set at $8. The parking
garage would operate 20 business days per month.

Roberts believes, based on PARKCO’s past experience with similar garages, that the
projected number of monthly and daily parkers is too high. When she questioned
Demming, he replied, “This garage is going to be built no matter what your past
experiences are. Just use the figures I gave you.”

A. Define sunk cost and opportunity cost.

A. How are these two types of cost recorded in the accounting records?

A. Identify the sunk costs and opportunity costs, if any, in the PARKCO
scenario and show the amount of each.

A. Using the data in the scenario, calculate pre-tax operating income.

Show your calculations.

A. Roberts is uncomfortable with the implications of Demming’s statement

and has turned to IMA’s Statement of Ethical Professional Practice for
guidance. According to this guidance, identify the ethical principles that
should guide the work of a management accountant.

A. Roberts is uncomfortable with the implications of Demming’s statement

and has turned to IMA’s Statement of Ethical Professional Practice for
 guidance. According to this guidance, identify the standards and
describe how they would or would not apply in the circumstances
described.

A. Roberts is uncomfortable with the implications of Demming’s statement

and has turned to IMA’s Statement of Ethical Professional Practice for
guidance. According to this guidance, identify the steps Roberts should
take to resolve this situation.