Accounting Ethics

Case 2-7

Milton Manufacturing Company

Milton Manufacturing Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The company’s primary operations are located in Long Island City, New York, with branch factories and warehouses in several surrounding cities. Milton Manufacturing is a closely held company. Irv Milton is the president of the company. He started the business in 2002 and it grew in revenue from $500,000 to $5.0 million in 10 years. However, the revenues declined to $4.5 million in 2012. Net cash flows from all activities also were declining. The company was concerned because it planned to borrow $20 million from the credit markets in the fourth quarter of 2013.

Irv Milton met with Ann Plotkin, the chief accounting officer (CAO), on January 15, 2013, to discuss a proposal by Plotkin to control cash outflows. She was not overly concerned about the recent decline in net cash flows from operating activities because these amounts were expected to increase in 2013, as a result of projected higher levels of revenue and cash collections.

Plotkin knew that if overall capital expenditures continued to increase at the rate of 26 percent per year, Milton Manufacturing probably would not be able to borrow the $20 million. Therefore, she suggested establishing a new policy to be instituted on a temporary basis. Each plant’s capital expenditures for 2013 would be limited to the level of capital expenditures in 2011. Irv Milton pointedly asked Plotkin about the possible negative effects of such a policy, but in the end Milton was convinced it was necessary to initiate the policy immediately to stem the tide of increases in capital expenditures. A summary of cash flows appears in Exhibit 1.

Sammie Markowicz is the plant manager at the headquarters location in Long Island City. He was informed of the new capital expenditure policy by Ira Sugofsky, the vice president for operations. Markowicz told Sugofsky that the...