Lone Star Power Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Lone Star Power Case Study Solution

Overview

Lone Star Power Company is situated in Southwest.The main objectiveof the company is to provide power generation and power distribution in the country. Currently, the company distributes electric power to more than 750000 homes, government agencies and business. Along with power distribution and generation, the company also is also selling some other products such as power generation backup system.

In 2016, the revenue of the company topped up thefirst time by 1 billion. Marianne Relzo an equity analyst from a well-regarded US investment bank claimed that the external communication of the company is an inappropriate one and hence it raises some issues. Ward Johnson, the chief investment officer at Lone Star Power intends to overcome Relzo concern but he is quite confused that how he should do this. In our report, we help Johnson in dealing with these issues.

Options

Using the following options Johnsons can address the issues raised by the Marianne Relzo.

Extraordinary General Meeting (EGM):

EGM is a meeting other than Annual General Meeting, the meeting is held between executives, shareholders and many other members. The meeting is usually called urgent or short notice to address emergency matters. (Miscellany, 2013)

As issue raised by the Relzo needs urgent consideration, therefore, the company can call an EGM in which it caninvite Relzo and can address the raised issues.

Disclosures in Next Financial Statement:

A company is required to provide notes in the financial statement which describe the events which cannot be addressed at the face of thebalance sheet, income statement, statement of cash flows and statement of changes in equity. One of the main issuesdescribed in this section is related to revenue recognition and explanation of accounting policies. (David Hirshleifer, 2003)

Relzo raised issue regarding the method of revenue recognition and chosen accounting policies, therefore, the company can clarify these issues in its next quarter financial statement.

Letter to the Marianne Relzo:

Marianne Relzo wrote a letter to Johnsons, therefore,a best method to address its concerns is that the chief investment officer should write a response to him which addresses Relzo concerns.

Principle and Guidelines in relation to the recording of the Revenue and Expenses

According to the principle and guidelines of GAAP, a company should recognize revenue and expenses on accrual basis. According to accrual basis, revenue should be recognized when a company completes a service or delivers a product like the revenue the expense should also be recorded when it incurred rather than on the cash basis. (Hana Bohusova, 2009)

Currently, the company record revenue when it enters into a contract with the customer or rendered services to itthis is against with the revenue recognition rule the company should record it when it completed the services.

Although the company record expenses using accrual accounting basis but from the comments of Relzo it seems that the company does not appropriately disclose them in the notes, therefore,company should follow disclosure principles to address this issue.

Lone Star Power Harvard Case Solution & Analysis

Consistent application of accounting methods

According to the principle and guidelines of GAAP, the company should separately maintain the financial records of each economic entity. The economic entity is defined as the entity that manages its own operations and earns its own revenue and incurs its own expenses. (Cliffsnotes)

The acquired companyAT&T operates in the telecommunication industry as this company operates in different sector, therefore, it may follow different accounting policies to record its financial affairs. Along with this, the revenue recognition criteria may be different as it is possible that the acquired company may usecash accounting principles to record its financial affairs hence, therefore, there is aninconsistency between the recording methodsof two companies. Lone Star Power should disclose this in the notes of the financial statement to clarify this inconsistency...................

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