Cardinal Health Case Study: Accounting for Contingent Assets

This assignment analyzes the Cardinal Health case study, focusing on the company's accounting practices related to contingent assets and litigation gains. The case examines the justification for deducting litigation gains from the cost of goods sold, a practice Cardinal Health employed to boost reported earnings, despite violating GAAP. The assignment explores the motivations behind this decision, including the desire to meet earnings per share targets and the senior management's defense of their actions. It delves into the SEC's investigation and the misclassification of gains, which led to significant regulatory issues. The assignment discusses the timing of gain recognition, the implications of the company's actions, and whether the senior management's behavior constituted fraudulent activity. The analysis highlights the importance of adhering to GAAP and the consequences of manipulating financial statements to present a misleading financial picture. The case also highlights the ethical considerations involved in financial reporting and the potential impact on stakeholders.

Running head: ACCOUNTING FOR CONTINGENT ASSETS
Accounting for Contingent Assets: The Case of Cardinal Health
Name of the Student
Name of the University
Author Note

ACCOUNTING FOR CONTINGENT ASSETS
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................2
Answer to question 3:.................................................................................................................2
Answer to question 4:.................................................................................................................3
Answer to question 5..................................................................................................................3
References list:...........................................................................................................................4

ACCOUNTING FOR CONTINGENT ASSETS
Answer to question 1:
The justification for deducting the litigation gain from the cost of sales is the without
classifying and recording such gain from the cost of goods sold, average consensus on the
estimates of earning per share would have been missed by Cardinal and the commitment of
higher growth of earning per shares would have also been missed (Hudson et al., 2019).
Recording of the expected litigation gain from the cost of goods sold was considered
as the violation of GAAP. Reason Cardinal chose to deduct the litigation gain from the cost
of goods sold instead of recording it as non-operating item despite the repeated advice from
the auditors. The classification of litigation gain as cost of sales reduction was opposed by its
auditors. The reason was to shield the expected earnings shortfall and thereby it assisted the
company in boosting their overall operating income (Wadlinger et al., 2017).
Answer to question 2:
The senior health executive at Cardinal meant that the shortfall of earnings did not
require much to cover and it such shortage is to address, it should not be from the expected
litigation gain to be recognized in the third quarter (Stowell et al., 2017). Since the vitamin
manufacturers were alleged of overcharging Cardinal health from 1988 ton 1998. Later on, a
provisional settlement was made in favour of Cardinal health where they could be receiving $
22 million. The phrase not steal from Q3 implies that cost of goods sold in the second quarter
is adjusted with the expected litigation gain.
Answer to question 3:
SEC guided Cardinal health to report their level of earnings using gains from the
vitamin case instead of adding up the initiatives of earning. The classification of gain from
litigation as reduction to cost of sales resulted the Cardinal health in violating GAAP. By

ACCOUNTING FOR CONTINGENT ASSETS
violating the requirements of GAAP of not using gains from vitamin case to increase their
level of earnings, and misclassifying the gains, Cardinal Health get into trouble with SEC.
Answer to question 4:
Vitamin litigation gain of $ 10 million was recorded on 31st December, 2000 which
marked the second quarter of financial year 2001. It was in the first quarter of financial year
2002 that is on 30th September, 2001 the settlement of litigation gain was thought to have
vindicated the accounting policies of Cardinal health. The senior management of the
company viewed that the contingent gained identified in year 2001 and 2002 was less that the
total amounts which the vitamin companies paid.
Answer to question 5
The accounting practice of Cardinal Health was not in compliance with the
requirement of GAAP as it calls for recording litigation gain as non-operating income. By
adjusting the litigation to the cost of sales, Cardinal issues materially false and misleading
earnings and also it failure to compliance with the standard resulted in disclosure failure
(Johnston & Zawojska, 2018). The earnings reported was materially represented by way of
misclassifying the gains. The behaviour of Cardin Health when rated on a 1-10 scale would
be classified as being downright fraudulent as the company willingly misclassified the gains
to lower down its cost of sales and increase their reported earnings.

ACCOUNTING FOR CONTINGENT ASSETS
References list:
Hudson, P., Botzen, W. W., Poussin, J., & Aerts, J. C. (2019). Impacts of flooding and flood
preparedness on subjective well-being: A monetisation of the tangible and intangible
impacts. Journal of Happiness Studies, 20(2), 665-682.
Johnston, R. J., & Zawojska, E. (2018). Benefit Transfer and Commodity Measurement
Scales: Consequences for Validity and Reliability (No. 2018-26).
Stowell, N. F., Sinclair, D., Johanson, E., Pacini, C., & Kearns, G. (2017). Wills, Asset
Protection Trusts, and Financial Crime. Journal of Forensic & Investigative
Accounting, 9(1).
Wadlinger, N., Pacini, C., Stowell, N., Hopwood, W., & Sinclair, D. (2017). Domestic Asset
Tracing and Recovery of Hidden Assets and the Spoils of Financial Crime. . Mary's
LJ, 49, 609.