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Accounting, Finance, SPSS
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English (U.S.)
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Potential Justification for Deducting the Expected Litigation Gain from Cost of Goods Sold

Essay Instructions:

The purpose of this assignment is to analyze liabilities when making business decisions.
Read Case Study 13-1, "Accounting for Contingent Assets: The Case of Cardinal Health," from Chapter 13 in the textbook.
In a 250- to 500-word executive summary to the Cardinal Health CEO, address the following:
Explain the potential justification for deducting the expected litigation gain from cost of goods sold, and explain why Cardinal Health chose this alternative rather than reporting it as a nonoperating item.
Explain what the senior Cardinal Health executive meant when he said, "We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3." Include specific clarification of the phrase "not steal from Q3."
Explain specifically what Cardinal Health did to get into trouble with the SEC.
Justify the timing of the $10 million and $12 million gains, and explain how Cardinal Health's senior managers defend these decisions.
Cardinal Health received more than $22 million from the litigation settlement. Discuss whether the actions of Cardinal Health senior managers were so wrong that they justified the actions of the SEC. Classify Cardinal Health's behavior on a scale from 1-10, with 1 being "relatively harmless" and 10 being "downright fraudulent." Justify your rating. Please use these questions
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

Essay Sample Content Preview:
Analyzing Liabilities
Analysis of liabilities is part of the financial analysis process that allows business operators to make responsible decisions based on the company's position. The number of liabilities that the organization has depicted its financial position and determines any entity's step. Therefore, Cardinal Health's decisions are tied to the analysis of its liabilities.
Cardinal Health justifies its decision to deduct the gain from the cost of goods sold since they believe that the over-charges from the vitamin manufacturers directly increased their cost of goods. They chose this alternative rather than reporting it as a non-operating item since by reducing the cost of goods sold, the earnings will be higher, thus yielding a higher Earnings Per Share, EPS. "The purpose was to close a gap in Cardinal's budgeted earnings for the second quarter of FY 2001, which ended 31 December 2000" (Young, Cohen, & Bens, 2018, p. 256). However, this decision has no basis in the US GAAP standards. The litigation gain had not been realized and was not realizable since the company had even opted out of the provisional settlement.
The statement by the company executive meant that there was an expected shortfall in earnings as would later be admitted by the company executive that would mean the company would not have achieved the analysts' average unanimity EPS estimate for the quarter, which is the hump (the difficult situation) t...
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