Accounting Smoothing

An operational smoothing tactic for the car dealership manager would be to offer a one month or greater delivery time with payment on delivery basis. She would go about this by setting a one month delivery time from when a car is ordered, from this point of view she is only able to receive the payments upon delivery which will be the following year, however she could consider a small down payment to retain the customer, this would mean that most of the sales income would fall in the following year instead of the twelfth month. Therefore this would enable her to reach easily the goals of the following year with her December sales. The legal advantage of this is that she is able to transfer the December incomes to January and hence she can easily achieve the following year’s goals easily. However in contrary this has an unethical view in that she would have to delay product delivery to the customer when it’s already available. This could also not work well since some customers would forfeit the deal before the month is over.

An accounting smoothing tactic for the car dealership manager would be to add expenses that would be incurred in the following year in the magnitude of income that would be raised in the month of December before the year ends. This is prepaying expenses. This would ensure that he levels December profitability to near zero or relatively a smaller negative

after which the following year she would not incur these expenses. For instance if she was to buy forklifts for use at his facility for the next year, then she would do that in the month of December, the incurred costs would then be levelled to nearly zero through income accrued from car sales in the month of December. There will be no legal demerit since no manipulation of data will be performed. The legal merit of this tactic would be that the accounting records will need no manipulation as everything will be accounted for at the exact time. This strategy would however be unethical since the manager considers procuring equipment’s at the wrong time, i.e. at an earlier date hence this may be a breach of procurement procedures.

In the event the manager considers smoothing to carry the incomes to the following year, she would achieve a better year ahead, however she finds no incentive to consider her December sales as they don’t count on her bonus. The manager would consider her next years expected returns, generally an expected low sale volume would consider income smoothing with no expected incentive and thus it acts as a way to cushion the event she misses her target. However since her dealership among many has done beyond expectation she deems fit for a greater bonus of which a lower sales dealership would be transferred of the sales volume. Since the manager may lack motivation, she could consider halving the income and smoothing the other half through a transfer program in which she assumes the bonus after her sales are transferred. However if the financial calendar was to be compiled biennially, then the manager would rather not consider smoothing but offer a bigger bonus at the end of second year. However taking bath would demotivate the manager, she would be delaying her realization of bonus and therefore considering another target scheme such as customer satisfaction would be better.