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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Ethics in Action

Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the company’s just completed financial statements. The following discussion took place between Lucas Hunter and Simmons' controller, John Jameson, in January, after the close of the fiscal year:

Lucas: I’ve been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This won't look good to our shareholders. Is there anything we can do about this?

John. What do you means? The past is the past, and the numbers are in. There isn’t much that can be done about it Our financial statements were prepared according to generally accepted accounting principles, and I don’t see much leeway for significant change at this point.

Lucan No, no. I’ve not suggesting that we “cook the books”. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good news—and. I might add, useful information. The higher cash flow from operating activities will give our creditors comfort.

John. Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there

Lucas: This is true, but somehow I think this information should be given a much higher profile. I don't like this information being “buried” in the statement of cash flows. You know as well as I do that many users will focus on the income statement Therefore. I think we ought to include an operating cash flow per share number on the face of the income statement—someplace under the earnings per share number In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think?

John I've never really thought about it like that before I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the idea—I'll start working on it.

Lucas: Glad to be of service.

How would you interpret this situation? Is John behaving in an ethical and professional manner?

To determine

Ethical Case:

In this case Person L believes that reporting operating cash flow per share on the income statement would be useful to the users, and Person J also agrees with the concept. But this is incorrect according to the Generally Accepted Accounting Principles (GAAP).

To determine: Whether Person J behaving in an ethical and professional manner.

Explanation

  • This is because it seems that Peron L is not happy with the performance of net income per share. In order to cover the drop down in the earnings, he decides to include the operating cash flow per share on the income statement. This idea of Person L violates the rules of Generally Accepted Accounting Principles (GAAP).
  • Thus, by agreeing with Person L, Person J is behaving in an unethical manner and breached his professional ethics...

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