Case Detail

Case Summary

Dragon Soup and Earnings Management (A)

Case Number: 5-211-251(A), Year Published: 2011

HBS Number: KEL574

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Authors: Craig Chapman

Key Concepts

Earnings Management, Ethics, Accounting, Real Earnings Management

Abstract

In the (A) Case, Jason Phillips, Chief Financial Officer of a soup manufacturing business, is given the task of maximizing the value of the firm twelve months after the case is set. Although he does not want to break any legal rules, Jason is interested to see whether accounting and real action choices can be used to enhance the company’s financial position and increase its perceived value to investors. The case permits him to select from a menu of options, including decisions on product pricing, inventory levels, accounts receivables, leasing or purchasing a new machine and valuation or sale of securities. These choices are fed into an Excel spreadsheet which adjusts financial projections and accounting disclosures accordingly.

Learning Objectives

To explore the concepts of ‘legal’ earnings management as compared to true value optimization.
To explore whether sophisticated investors misled by such behaviors.
To explore the management of information flows to investors.

Number of Pages: 8

Extended Case Information

Teaching Areas: Accounting

Teaching Note Available: Yes

Geographic: United States

Industry: Manufacturing, Durable Commodity Consumer Products

Organization Size: Small

Decision Maker Position: CFO

Decision Maker Gender: Male

Year of Case: 2010