Reference no: EM131299719

Question 1

The board of directors is considering updating the fleet of vehicles of the company which are used to ship goods to markets all around the United States. They will be leasing the vehicles as opposed to purchasing them outright. Please explain the advantages of leasing and which lease type would be more preferable?

Respond to this...The advantages of leasing include 100% financing at fixed rates and often require no money down from the lessee, protection against obsolescence to the lessee and passing the risk of residual value to the lessor, flexibility, less costly financing, tax advantages such as not having to report an asset or liability for a lease agreement, and off balance sheet financing. (Kieso, Weygandt, & Warfield, 2013).

I would say an operating lease is the more preferable lease options because if the company used a capital lease they would have an increase in the amount of reported debt (both short-term and long-term), have an increase in the amount of total assets (specifically long-lived assets). And they would have a lower income early in the life of the lease and, therefore, lower retained earnings.

"Many companies believe that capital leases negatively impact their financial position: Their debt to total equity ratio increases, and their rate of return on total assets decreases. As a result, the business community resists capitalizing leases. Whether this resistance is well founded is debatable. From a cash flow point of view, the company is in the same position whether accounting for the lease as an operating or a capital lease. Managers often argue against capitalization for several reasons. First, capitalization can more easily lead to violation of loan covenants. It also can affect the amount of compensation received by owners (for example, a stock compensation plan tied to earnings). Finally, capitalization can lower rates of return and increase debt to equity relationships, making the company less attractive to present and potential investors" (Kieso, Weygandt, & Warfield, 2013, pg. 1282).

References

Kieso, D. E., Weygandt, J. J., Warfield, T. D. (2013). Intermediate Accounting, 15th Edition. [VitalSource Bookshelf Online]. Retrieved from https://ambassadored.vitalsource.com/#/books/9781118722671/

Question 2

In some cases, one of the purposes of initiating a business combination is to control your value chain through vertical integration.
Consider the following two independent scenarios:
1. General Motors relies on an unrelated company for a key component
2. General Motors relies on a vertically integrated subsidiary for a key component
Discuss the pros and cons of both scenarios. Specifically address how a subsidiary that provides products only to the parent can be fairly evaluated on performance. What do you believe is the best option for General Motors? Explain.
Respond to this...The cons and pros could be pros and cons for the other.
1. General motors relies on an unrelated company for key components
Pros
- The business can just purchase a new product instead of spending the money and time to create it.
- Don't have to spend a lot of money purchasing or integrating the affiliate.
Cons
- Don't have control of the production.
- No control over the cost and price.
- They don't know the quality of the product they are receiving.

2. General motors relies on a vertically integrated subsidiary for a key component.
Pros
- Control over the production part of the distribution process
- Cost control
- Eliminate the mark ups that occur during the manufacturing process
- Increases advantage over competition.
- Being able to adapt to their customer's changing needs
- Know the quality of the product
Cons
- Instead of just purchasing a new product they need to design and create it.
- It costs a lot of money to integrate; especially for a smaller business.

I think the best decision for General motors would depend on the parts they are purchasing. They should integrate if they are purchasing a high quantity of one part and especially if that company is producing other products General Motors uses. If it is for a product they don't use much of then they should just keep purchasing it.

8 Advantages and Disadvantages of Vertical Integration. (2015, July 1). Retrieved from NavajoCode: https://navajocodetalkers.org/8-advantages-and-disadvantages-of-vertical-integration/
Advantages and Disadvantages of Vertical Integration. (2014, December 11). Retrieved from OccupyTheory: https://occupytheory.org/advantages-and-disadvantages-of-vertical-integration/
Kokemuller, N. (n.d.). The Advantage of a Vertical Integration Strategty. Retrieved from Chron: https://smallbusiness.chron.com/advantages-vertical-integration-strategy-20987.html

Question 3

The growth of information technology has caused the accounting industry to further examine control and security issues. Do you feel it is possible to provide absolute security for a company's information system? Why or why not? What are some controls that can be put into place to enhance the security of the information system? Explain.

Respond to this...It is impossible to provide absolute, 100% information security at a company. There are so many risks, and in this modern age, we like the convenience of our computers, smart phones, email, and even wireless printers and scanners, that we sacrifice some of this security. Issues in information security continue to grow because of both how reliant we are on our technology and how we access it.

If I have a sick child, I now can work from home. I have remote access with my laptop, wireless network, and have a "SecurID" by RSA that I use with my personal password and the encryption code that changes every 30 seconds. While my network access seems secure, my wireless connection at home or at my hotel could be susceptible to hackers. Also, even if we were able to fully secure our connection to the Internet and our software products, we would still have to contend with human nature. We might receive an email from what appears to be a friend, and we click on a link or picture that they have sent us. Also, we get a call from a manager or executive who is desperate for information and cannot get into the network, so we try to help. We can all be susceptible to these social engineering tactics.

That being said, there are a number of controls that can be put into place to make it more difficult and to deter fraudsters. With proper controls making it harder for hackers, they typically will pursue other companies and devices that are easier to access.

First, training will be key for employees as they are the first line of defense. They need to make sure that they follow protocols when they receive a call requesting information or when they receive an email from someone they do not know. Employees also need to create strong passwords for authentication and make sure that these are on a regular rotation for updating.

Second, the Company's IT team needs to make sure that the firewall is working. It should make sure that patches are applied as soon as they come out and that with new software, the passwords and security are engaged by day 1 of implementation. Many people leave the factory default passwords as there are and do not update, which makes the system susceptible.

Third, work with HR and management to determine who needs what level of access. Compensation and benefit files are highly confidential, but so are customer information files and financial statement information. Trades can be made on insider information, so only those that need to now the information should have access.

Fourth, for those who travel or who have iPads and cell phones, leaders need to make sure that the devices are password protected and even issue devices like Jetpacks so public Wi-Fi is not used, which would expose the devices to vulnerabilities.

There are far more controls that should be integrated and used, but these are a few good places to start.