Ryan Company has as a goal that its earnings per share should increase by at least 3% each year; this goal has been attained every year over the past decade. As a result, the market price per share of Ryan’s common stock also has increased each year. Last year (2006) Ryan’s earnings per share was $3. This year, however, is a different story. Because of decreasing sales, preliminary computations at the end of 2007 show that earnings per share will be only $2.99 per share.
You are the accountant for Ryan Company. Ryan’s controller, Jim Nastic, has come to you with some suggestions. He says, ?oI’ve noticed that the decrease in revenues has been primarily related to credit sales. Since we have fewer credit sales, I believe we are justified in reducing our bad debts expense from 4 to 2% of net sales. I also think that because of the decreased sales, we won’t use our factory equipment as much, so we can extend its estimated remaining life from 10 to 15 years for computing our straight-line depreciation expense. Based on my calculations, if we make these changes, Ryan Company’s 2007 earnings per share will be $3.06. This will sure make our stockholders happy, not to mention our CEO. You may even get a promotion. What do you think???
From financial reporting and ethical perspectives, prepare a response to Jim Nastic regarding his suggestions.