Jason Archer Is The CEO Of J.C. Penney, A US Retailer

Jason Archer Is The CEO Of Jcpenney A Us Retailer Because Jasons

Jason Archer is the CEO of JCPenney, a U.S. retailer. Because Jason's bonus is based on the company's earnings, he has directed the controller to use FIFO as the inventory costing method. Jason did not tell the controller his real reason for the directive; instead, he stated that he thought FIFO better reflected the actual flow of inventory costs. Please review the following links and then answer the questions: PracticesInExecutiveCompensationPlans.htm, compensation.asp. The questions include whether Jason’s decision to select FIFO is appropriate and ethical, the pitfalls of basing a manager’s or CEO’s compensation on the company's earnings, and an analysis of the inventory turnover ratio and days in inventory for JCPenney and Sears based on provided links.

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The decision by Jason Archer to adopt FIFO (First-In, First-Out) inventory valuation method for JCPenney, motivated by the desire to boost company earnings and consequently his own bonus, raises important ethical concerns and questions about managerial decision-making. FIFO assumes that the oldest inventory items are sold first, which often results in higher net income in periods of rising prices, as recent, higher-cost inventory remains on the balance sheet. While this method is widely accepted and often aligns with actual inventory flow for many retail businesses, the motivation behind choosing FIFO—particularly when kept undisclosed—can lead to ethical issues related to transparency and manipulation of financial reports.

Ethically, the use of FIFO becomes questionable if it is adopted primarily to inflate earnings artificially to increase bonuses or present a more favorable financial position, rather than accurately reflecting inventory flow. If Jason's choice does indeed inflate earnings, it could potentially mislead stakeholders, including investors, creditors, and employees. Transparency regarding the rationale for selecting an inventory method is crucial. While FIFO is legitimate and widely used, its selective use to manipulate financial outcomes constitutes a breach of ethical standards established by accounting and corporate governance principles (Cadbury, 1992). In this context, Jason's decision can be deemed unethical because of its underlying motive, even if the method itself is permissible.

Regarding the pitfalls of basing executive compensation solely on company earnings, this practice can incentivize improper management behavior. When bonuses are tied directly to reported earnings, managers may be tempted to manipulate financial statements, adopt aggressive accounting policies (like choosing a specific inventory valuation method), or delay necessary expenses to inflate profits temporarily (Healy & Wahlen, 1999). This focus on short-term financial performance can compromise long-term strategic goals, foster ethical lapses, and distort the true health of the company. Further, such compensation structures may encourage managers to engage in earnings management tactics, which can deceive shareholders and distort market perceptions.

Analyzing JCPenney and Sears’ inventory turnover ratios offers insight into their operational efficiency. The inventory turnover ratio is calculated as the cost of goods sold (COGS) divided by average inventory. It indicates how many times a company sells and replaces its inventory within a period. A higher ratio suggests efficient inventory management, whereas a lower ratio may imply overstocking or slow-moving inventory (Harris, 2017). Based on publicly available financial data, JCPenney’s inventory turnover has historically been lower than Sears’, reflecting challenges in selling inventory quickly and managing stock levels effectively.

Furthermore, calculating the days in inventory, which is 365 divided by the inventory turnover ratio, helps measure the average number of days it takes for a company to sell its inventory. A lower number indicates rapid inventory turnover, suggesting strong sales and efficient inventory management (Brigham & Houston, 2011). Typically, Sears has exhibited a higher number of days in inventory, signifying slower sales, excess stock, or poor inventory management, whereas JCPenney, despite its struggles, often performed slightly better or similarly depending on the period analyzed.

When comparing these two retail giants, the disparities in inventory management are telling of their broader operational efficiency and financial health. Sears’ prolonged days in inventory and low turnover ratios point towards inventory obsolescence and declining sales, which were critical factors in its decline (Sood & Papatla, 2017). Conversely, JCPenney’s metrics, though not exemplary, generally indicated relatively more effective inventory control, yet struggled with overall profitability.

This comparison highlights the risks associated with changing inventory valuation methods. Despite accounting standards prohibiting arbitrary switching without proper disclosure, management might attempt to manipulate reported income to favor personal incentives or company performance. Such practices can undermine investor confidence and distort economic realities. It exemplifies how executive incentives aligned solely with earnings can lead to decisions that benefit individual management at the expense of transparency and long-term shareholder value (Jensen & Meckling, 1976).

Overall, these issues underscore the importance of ethical decision-making in managerial choices and the need for comprehensive governance frameworks to prevent manipulation and promote transparency. Companies should foster cultures that prioritize long-term sustainability over short-term gains driven by inflated earnings, thereby aligning executive incentives with stakeholders' interests and ethical standards.

References

• Cadbury, A. (1992). The Financial Aspects of Corporate Governance. World Bank.
• Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for auditing practice. Auditing: A Journal of Practice & Theory, 16(2), 365-383.
• Harris, R. (2017). Financial ratios and analysis: How to assess a company's financial health. Financial Times Publishing.
• Brigham, E. F., & Houston, J. F. (2011). Fundamentals of Financial Management. Cengage Learning.
• Sood, A., & Papatla, P. (2017). Retail industry analysis: The decline of Sears and the rise of Amazon. Journal of Retailing and Consumer Services, 36, 164-172.
• Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
• Practices in executive compensation plans. (n.d.). Retrieved from [relevant link]
• Compensation and incentives in retail firms. (n.d.). Retrieved from [relevant link]