$2,000 in 2002. This results in income of $35,000 in 2001 and $41,000 in 2002 (see attachment), with no difference of the total warranty expense over the two-year period.
Every company has diverse groups of stakeholders, and Grace, Inc. is no different. The obvious stakeholders at issue here are the owners (shareholders) who have come to expect growth in income at Grace. The managers who support the aggressive earnings management approach fear that if income remains steady, investors will become dissatisfied stock and force the stock price down. However, shareholders are likely to be concerned with the fact that revenues are flat for 2001 and 2002, an issue that restating warranty expense does not address.
Another group of stakeholders are the company's customers. If the company inflates its warranty expense to $8,000, current and potential customers may interpret this as an indication that the company's quality is suffe
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