Auto World Inc Essay

Auto World Inc. (AWI) is a leading automotive retail and service chain. They have many operating segments comprised of two different centers 10 miles apart from each other. Pit Stop Centers (PSC) offer service labor, installed merchandise, and tires while their Auto Boyz Centers (ABC) sells automotive merchandise. AWI has a plan to close their operating segment PSC to change their current operating structure to improve and efficiently deliver retail products and automotive services by providing their customers with a ‘one stop’ shopping for ‘do-it-yourself’ retail customers and ‘do-it-for-me’ customers† (PSC Case). AWI expects this change to enhance their ability to increase market share, improve sales, and company earnings. This change in restructuring will have an effect on current earnings and will need to be reported properly in their 2007 Income Statement. AWI must report this continuing activity properly under US Generally Accepted Accounting Principles (GAAP). The FASB Accounting Standards Codification (ASC), commonly known as GAAP has specific standards that must be followed in order to classify the disposal of an entity as discontinued or continues operation of a component of an entity. Under the guidance of numerous ASC’s, AWI does not meet the two conditions to report their PSC closures as discontinued operations. The criteria used, assessment period, presentation, and disclosure for this retail company will be explained in detail when applying proper GAAP. A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity; it may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group in which Auto World determined correctly under the first requirement that the PSC met the definition of a â€Å"component of an entity† (ASC 205-20-20). The two conditions for reporting the disposed transaction as discontinued operations are: The results of operations of a component of an entity that either has been disposed of or is classified as held for sale under the requirements of paragraph 360-10-45-9, shall be reported in discontinued operations in accordance with paragraph 205-20-45-3 if both of the following conditions are met: 1. The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction. 2. The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction (ASC 205-20-45-1). Several steps below will be used to explain why the disposal of the PSC stores should be considered a continuation of operations rather than discontinue of operations (ASC 205-20-55-3). These three steps along with their respective answers are also depicted in a flow chart (see Appendix A). Step one asks are continuing cash flows expected to be generated by the ongoing entity? Yes, the continuing cash flows are being generated by ABC from transactions with customers from PSC. Step two asks if the continuing cash flows result from a migration or continuation of activities. The continuing cash flows are the result of a migration from the closed PSC’s to the â€Å"one stop† ABC. ABC sells products similar to those sold in the closed retail stores. After the closure of the Pit Stop Centers, Auto World estimates that there will be continuing cash flows from the sale of automotive services and tires by the ongoing ABC’s of approximately $600 million. Auto World estimates that the Pit Stop Centers would have generated approximately $700 million of sales absent the disposal transaction (PSC Case). Step three asks if the continuing cash flows are significant. Yes, the ongoing ABC estimates the continuing cash inflows will approximate 86 percent (see Appendix B) of that would have been generated by PSC’s absent the disposal transaction. AWI is expecting these actions to generate significant cash flow in 2007 and to increase free cash flow in 2008. AWI is also expecting to yield improvements in operating earnings of approximately $58 million in 2008 to be significant leading to the classification as a discontinued operation to be inappropriate (ASC 205-20-55-70). Since stakeholders rely on financial statements to base their decisions and to project future cash flows, current information presented must be accurate under GAAP Under the second requirement, one issue I have identified is the intentions of management’s decisions to improve their company’s net earnings. The professional literature I relied on are these two statements, â€Å"the actions we are announcing today will further enhance our ability to increase market share and improve sales and earnings at our company† and â€Å"in this regard, we remain committed to the automotive business and we expect to deliver significant additional profitable growth† were made by Mr. Bobby, chairman and chief executive officer. When considering the use and disclosure of restructuring charges, depending on the industry, there should not be re-occurring â€Å"restructuring cost† line item on the Income Statement year after year. Closing the PSC stores as of the second quarter in June 2007 is an event taking place in 2007 which can happen only once. If management continues to show this type of special/unusual charge in future periods, the question of integrity should be raised. Management does not want to give off the impression of possibly smoothing earnings by using restructuring charges. â€Å"Once a decision to restructure is made, GAAP requires companies to estimate the future costs they expect to incur to carry out the restructuring for such things as plant closings (AWI currently estimates it will incur restructuring and other charges totaling $52 million pre-tax). These estimated restructuring costs are then charged to an expense account with an offsetting credit to a liability account (Restructuring reserve) in the current period† (Revsine, pg 155). In developing my recommendation and conclusion for resolving this issue, management should make a foot note explaining these changes which will allow stakeholders to make better decisions. The new re-structured ABC will continue to sell automotive parts that were previously sold through the PSC’s, and under the ASC, PSC store closures are not considered and cannot be reported as a discontinued operation in AWI’s second quarter financial statements. The continuing cash flows are being generated by ABC from transactions with customers from PSC, given by the level of significance of 86 percent for this continuing cash flow subsequent to the disposal transaction.

Analysis of the Research of Professor Zachary Holman Essay

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With reference to two areas of knowledge discuss the ways in which Essay

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Knowledge Management Processes & Tools Essay Example | Topics and Well Written Essays - 3000 words

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New business plan - organic oil Essay Example | Topics and Well Written Essays - 500 words

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In todays economy are we heading towards a Great Depression - Research Proposal Example The American economy is brought to a halt. And with the presidential elections recently concluded, we wonder if the president-elect will be able to save, or at the very least revive, the country’s flat lining economy. What is apparent is that there is a need for a re-assessment of the policies governing these markets. Analysts agree that this brings change to the outlook of America as the top superpower, financially (Faroohar, par. 2). Everyone who used to look up to the financial bigwigs of the United States in awe are now re-thinking if they are in fact right with their views. They are now shifting their thoughts toward a more favorable view of the significance of the government in trade and business. They are already projecting that this in the future will be the definitive moment when global capitalism was uprooted from the U.S. (Zakaria, par. 5-7). Fareed Zakaria in his article at Newsweek points out that today is the ‘Age of Bloomberg’ and the end of the ‘Age of Ronald Reagan and Margaret Thatcher’. Perhaps the plummet of laissez-faire capitalism towards something everyone is yet to figure out is something we can all agree upon. If necessary measures are not implemented quickly then this is heading nowhere but another Great Depression. What makes the difference is the knowledge that is available today based on history. Time is of the essence and as anyone can predict, if this continues to drag on into years, then, an impact as great as seen in history books or maybe worse will occur. Ironically, from the independence of a free and unobstructed market, businesses today are looking to the government to facilitate for their breathing room. The $700 billion to be passed on to the taxpayers seems to be too much at hindsight. The implosion of some of the world’s biggest investment banks left everyone dumbfounded. The Great Depression has always been associated

Infulence of particpation in strategic change; resistance, Annotated Bibliography

Infulence of particpation in strategic change; resistance, organization commitment and goal achievement - Annotated Bibliography Example The article examines how the right to reject a decision on resistance to change, change goal achievement, and post change commitment to the organization; and consultative participation are related. Lines, in testing his hypotheses, opted to include the option of rejecting a proposed change since may assist in capturing instances where organizations forego changes that they deem optimal because from the change recipient perspective, they are not acceptable. Additionally, Lines used a set of three variables that represented outcomes, which allowed for a comprehensive assessment of whether a strategy implementation is complete or not. He tries to establish whether the effects of participation are dependent on the context in which an approach is applied by focusing on the extent to which change is: compatible to organizational culture, expected to lead to less or more job variety, and expected to lower costs. The finding of the study indicated that existence of positive relationship between participation and organizational commitment and goal achievement. The findings showed that a strong negative relationship exists between participation and resistance to change and that the personal goals of recipients and the compatibility of changes with the culture of the organization moderated the effects of participation. I picked Mowday et al., (1979) because it offered a lot of insight with regards to the compatibility of change with the organizational culture and the recipients’’ acceptance of the values and beliefs of the organization. I also picked Porter et al, (1974) as an influential article because it offered more insight into assessing post change organizational commitment, and how it is affected by participation. The article by Hackman and Oldham (1975) was influential in the interpretation of the study’s results, especially with regards to