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Ethics In Action
Case 1. Design incorporated experienced a downturn in December sales. To make matters worse, many of the recent sales were on account; because many customers were not paying on their accounts, the ending balance of
Jim became worried because he remembered the bank telling him about the importance of strong operating cash flows, so he told the accountant to redo the statement but not to reduce the net income by the accounts receivable increase or the gain on the land sale. The accountant refused because these adjustments were necessary in order to properly arrive at the net cash provided from operating activities. If these adjustments were not made, then the net change in cash could not be reconciled. Jim finally agreed out then told the accountant to just include the cash proceeds from the sale of land in the operating activities rather than in the investing activities The accountant said that would be wrong. Besides. everyone would know that proceeds from the sale of land should be an investing activity. Jim then suggested listing it as “other” in the operating section so no one would ever know that it wasn’t an operating cash flow.
Why didn’t Jim want the accountant to decrease the net income by the increase in accounts receivable and the gain on the land sale? Why do you think Jim finally agreed with the accountant? Could the operating cash flows be increased by including the cash proceeds from the sale but listing them as “other” rather than as land sale proceeds? What ethical concerns are involved? Do you have any other thoughts?
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Financial Accounting, Student Value Edition (5th Edition)
- Ethics and Cash Flows You are the accountant for Nello Company, which manufactures specialty equipment. Nello has been in financial difficulty, so its suppliers require purchases to he paid in cash. Furthermore, Nello has long-term debt with a debt covenant that requires it to maintain a 1:1 acid-test (quick) ratio. Nellos employees work a 5-day week, Monday through Friday. On Wednesday morning during the last week of the current year, Sam (the production supervisor) comes to you and says, I dont understand it. We have this large special order from a customer that must be delivered at the end of the first week in January. Once we get the raw materials, it is going to take 5 solid days of work without overtime to produce the order. If Bob (the president) would let me order the raw materials this morning, we could have them by late today. This would give us 2 days this week and the 4 days after New Years Day (Monday) of next week to complete the order without incurring overtime costs. But Bob says we must wait until next Tuesday to order the materials. This means we will have to work double time that Wednesday through Friday to finish the order. That overtime cost is going to really increase next years factory salary expense, so our profit and operating cash flows from that order will be very low. Please talk to him. When you approach Bob about buying the raw materials this morning, he says, If we purchase those materials today, we will have to write a check. And that means our cash flow from operating activities for this year will be much lower, which our shareholders wont like. Furthermore, our quick ratio will go down from 1.01:1 to 0.90:1, so our creditors may be upset. I know our profit and operating cash flows for next year will be lower if we delay the purchase, but that seems to be the best decision. Dont you agree? Required: From financial reporting and ethical perspectives, how would you respond to Bob?arrow_forwardDiscuss how each of the following transactions will affect assets, liabilities, and stockholders equity, and prove the companys accounts will still be in balance. A. A company purchased $450 worth of office supplies on credit. B. The company parking lot was plowed after a blizzard. A check for $75 was given to the plow truck operator. C. $250 was paid on account. D. A customer paid $350 on account. E. Provided services for a customer, $500. The customer asked to be billed.arrow_forwardThe receipt of $8,000 cash for fees earned was recorded by Langley Consulting as an increase in cash of $8,000 and a decrease in retained earnings (revenues) of $8,000. What is the effect of this error on the accounting equation? A. Total assets will exceed total liabilities and stockholders’ equity by $8,000. B. Total assets will be less than total liabilities and stockholders’ equity by $8,000. C. Total assets will exceed total liabilities and stockholders’ equity by $16,000. D. The error will not affect the accounting equation.arrow_forward
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- Read the scenario and answer the question. The net income of Cruz', a department store, decreased sharply during 20x5. Mark Cruz, owner of the store anticipates the need for a bank loan in 20X6. Late in 20X5 he instructed the accountant to record a P26,000 of furniture to the Cruz family, even though the goods will not be shipped from the manufacturer until January 20X6. Cruz also told the accountant not to make the following December 31, 20X5, adjusting entries: Salaries owed to employees P18,000 Prepaid insurance that has expired 5,300 QUESTION: Based on case 1, why did Cruz take this action? Is this action ethical? Give your reason, identifying the parties helped and the parties harmed by Cruz' action.arrow_forwardRead the scenario and answer the question. The net income of Cruz', a department store, decreased sharply during 20x5. Mark Cruz, owner of the store anticipates the need for a bank loan in 20X6. Late in 20X5 he instructed the accountant to record a P26,000 of furniture to the Cruz family, even though the goods will not be shipped from the manufacturer until January 20X6. Cruz also told the accountant not to make the following December 31, 20X5, adjusting entries: Salaries owed to employees P18,000 Prepaid insurance that has expired 5,300 QUESTION: Based on case 1, as a personal friend, what advice would you give the accountant?arrow_forwardi) In preparing the accounts of your company you are faced with a number of problems. These are: The long-term future success of the company is extremely uncertain. At the year-end, an amount is outstanding for water that has been consumed during the accounting period. During the year, the company purchased Sh.1000 worth of biro pens these had all been issued from stock and were still in use at the end of the year. A debtor who owes a large amount to the company is rumoured to be going into liquidation. The company has had a poor year, and the directors believe that a more balanced results could be presented if a LIFO (last-in-first-out) stock valuation method was adopted, instead of the present FIFO (first-in, first-out) method. Required: State which accounting concepts the accountant should follow in dealing with each of the above problems, and explain briefly what each concept means. ii) The following categories of people are…arrow_forward
- Read about Kelly Corporation in CA4-3 in the end of chapter and answer questions a) & b). CA4-3. (Earnings Management) Charlie Brown, controller for Kelly Corporation, is preparing the company's income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets' lives, the losses would not be so great. Since depreciation is included among the company's operating expenses, he wants to report the losses along with the company's expenses, where he hopes it will not be noticed. Answer the following questions: (a) What are the ethical issues involved? (b) What should Brown do?arrow_forwardEvaluate the financial status of my icecream business chills and fruit by analyzing the general business transactions. Is the business making a profit or operating at a loss? Prospects of gain/loss. Invested in the business issuing common stock worth $100,000. Acquired an ice cream machine worth $30,000, paying $10,000 in cash, and issued a note for the remaining amount. Paid rent of the factory building for 12 months in advance worth $12,000. Purchased supplies worth $7,000 on the account. Cash sales worth $12,000. Sales on the account of $8,000. Paid salaries to staff amounting to $14,000. Received utility bill amount of $4,000, which will be paid in the following period. Made a $10,000 partial payment of the note, with accrued interest of $100. Received $4,000 from credit customers.arrow_forward(essay) After examining the financial statements, the owner of a small business expressed surprise that the firm's cash balance had decreased during the month even though there was substantial net income. Do you think this owner is right to expect cash to increase because of a substantial net income? Why or why not?arrow_forward
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