Exercise 1 16A Applications of the Sarbanes Oxley Act
The CFO of the Bancor Microscope Corporation intentionally misclassified a downstream transportation expense in the amount of $50,000,000 as a product cost in an accounting period when the company made 10,000 microscopes and sold 8,000 microscopes. Bancor rewards its officers with bonuses that are based on net earnings.
Required
- Indicate whether the elements on the financial statements (i.e., assets, liabilities, equity, revenue, expense, net income, and cash flow) would be overstated or understated as a result of the misclassification of the upstream research and development expense. Determine the amount of the overstatement or understatement for each element.
- Based on the provisions of the Sarbanes Oxley Act, what is the maximum penalty that the CFO could face for deliberately missrepresenting the financial statements?