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In this Ethics Case, Bricker Graphics is looking into purchasing a new machine. Bricker Graphics is convinced that this machine will increase their profitability and increase their return on assets which has been dismally low. This ethics case regards some questions that are brought up by the Controller to the Chief Operating Officer. The company that is selling the machine is willing to accept a note from Bricker Graphics at the face amount of $12.5 million. However, the COO (Benson) is interested in financing the machine with stock instead of acquiring more debt. The COO’s plan is to issue shares for a total of $10 million. Because the machine doesn’t have a quoted selling price, Benson believes that he can use the selling price of other pieces of equipment similar to the machine which was also around $10 million. He believes that by doing this, it would help the rate of return by keeping the asset base low.
First, we’re going to discuss how this approach would affect the rate of return. It’s important to note that it is legal to issue shares for noncash consideration. According to Spiceland, “shares might be given in payment for land, or for equipment, or for some other noncash asset” (Spiceland, et.al., p. 1060, 2020). The situation that Bricker Graphics is in currently is most likely that “the company might have over-invested in assets that have failed to produce revenue growth” (McClure, 2020). This could be the reason why Benson is so wary to take on additional assets in order to increase profitability. If Benson elects to categorize the machine as stocks rather than take in debt for it and account for it as an asset (which is what it should be categorized as seeing as it’s equipment) then his asset base is lower. As the extra profits from the productivity of this new machine begin coming in, return on assets would increase because the asset base is staying low. If Benson categorizes the new machine as an asset, his return on assets is going to decrease because he is adding more equipment while the profits of the company are still pretty low. Over time, as the profits begin to increase due to the new machine, return on assets will also increase.
What Benson is suggesting cheats the system in a way. He is going to understate assets on his balance sheet by not accounting for all of the equipment that the company is actually using. This proposal is definitely not ethical. Even though companies are allowed to exchange stock for land and equipment in some cases, Benson is trying to do it in a situation where it wouldn’t be warranted. In my opinion, the COO should take the advice of the Controller and stick with the debt instead of trying to bypass it. 2 Corinthians 8:21 says it best- “For we are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of man” (NIV). Benson is going to have to “take pains” by allowing the return on assets to remain low for a little while longer if he really believes that this machine will raise profitability for the company. He is not only answering to Bricker Graphics, but he is, most importantly, answering to God. God requests that we do the right thing, even if it might hurt.
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