Legality and Ethicality of Financial Reporting

1241 Words Aug 6th, 2014 5 Pages
Legality and Ethicality of Financial Reporting

Janet Tran

ETH/376

Kathrine Parks

University of Phoenix/Axia

July 21, 2014

Excello Telecommunications was presented with a dilemma on how the company should report earnings so that they would appear to have met earning estimates for the 2010 financial year. The CFO, Terry Reed, was concerned with how failure to meet earning estimates would affect bonuses, stock options, and the share price of Excello stock. On December 201, 2010, the company sold $1.2 million of equipment to Data Equipment Systems. However, Data Equipment Systems requested that Excello hold on to the product until January 11, 2011, because they do not have the
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In the first scenario, the company transfers the product to an off-site warehouse owned by Excello by December 31 and holds it there until January 11 when it would be shipped to Data Equipment. The second scenario would transfer the product to Data Equipment by December 31 and agree that the customer could return it for a full refund after it has arrived at Data Equipments warehouse. The third option has Excello offering Data Equipment a 10 percent discount to take the product by December 31. The first scenario would be unethical because it does not comply with GAAP or the AICPA Code of Professional Conduct because Excello still has ownership of the goods. The goods are being sent to an off-site warehouse that is owned by Excello Telecommunications. It would be unethical for the company to choose this because the transfer of ownership has not occurred. A transfer of ownership would only occur when Data Equipment has the goods in their possession. Excello would legally still have legal title of the goods since it was stored in their warehouse. Failure to comply with this principle could cause a lot of negative consequences for everyone that has a public interest in the company. Second scenario would not be beneficial to the company and it would also not be ethical to take this approach. If Data Equipment returns the goods before the financial reports are released, disclosure of the goods being returned must be
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