Analyzing Liabilities Cardinal Health justified the increase in their net income by deducting the expected litigation gain from the cost of goods that were sold. They made the choice to record it as a nonoperating income so that it is seen as if it were earned outside of the normal course of business. Changing the earnings, documenting conditional assets early, and terms violated the conservatism doctrine for gains (Young et al., 2019). The senior executive at Cardinal Health did not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3 (Young et al., 2019). The firm misrepresented the figures which presented the wrong picture of their operations and indicated growth in operating revenue, earnings, and growth trend. In an attempt to hide declines in FY 2001 and FY 2002 to meet financial performance expectations, the firm did not report the contingent assets as non-operating items. The Cardinal Health executives considered the litigation increase as a success. The statement that their senior executive made suggested there was no need to use income initiatives for the third quarter because it would be seen as nonprofitable. The investors would not have been pleased. Applying this future gain in litigation permitted Cardinal to not only close the gap in earnings but post to analysts' targets. Cardinal Health was in trouble with the SEC for numerous reasons. For example, they were not in agreement with the GAAP (general accepted accounting principles) and artificially exaggerated the overall prices giving a false-positive figure. To overstate the revenue, contingent gain was withheld from the final cost of the goods that were sold. This amount does not speak about the cost of goods sold or to sales, which makes it a non-operating item.
3 Cardinal also ignored following GAAP in reference to adjustments but followed their own personal agenda. This behavior is highly unethical. They should have waited until FY 2002 when the vitamin firm reached a settlement. The $10 million dollars Cardinal received was on the last day of the second quarter of FY2001, and they received this from a contingent vitamin litigation gain as a reduction to cost of sales (Young et al, 2019). The twelve million dollars that they reported came from the need to describe an increase in gain for Q1, which also covers the expected shortage in earnings. This increased the gains from litigation to $22 million. The firm received $128 million (which is a significantly higher amount) and management could have justified it by declaring that receiving at least $22 million was likely hence based on conservatism principle they have recorded lowest possible profit. According to the annual report on Form 10-K that was filed with the SEC for FY 2004, Cardinal Health reversed both gains by restating its financial results. The damage cannot be undone though. The senior managers should have recorded the $22 million as nonoperating income because the estimated vitamin recovery arose from litigation (non-recurring) and stemmed from claims again third parties (Young et al, 2019). Management set out to line their own pockets by inflating the revenue and earnings to affect their management bonuses. These are fraudulent and unethical actions that reflect poorly no matter how they spin it. I rate them at an 8 out of 10 since they made the necessary corrections.
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