Concept explainers
Ethical Decision Making: A Mini-Case
Assume you work as an assistant accountant in the head office of a DVD movie kiosk business, similar to Outerwall’s Redbox machines. With the popularity of online movie rental operations, your company has struggled to meet its earnings targets for the year. It is important for the company to meet its earnings targets this year because the company is renegotiating a bank loan next month, and the terms of that loan are likely to depend on the company’s reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain funds for establishing its own presence in the online movie rental business. The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the
Required:
Discuss the CFO’s proposed solution. In your discussion, consider the following questions: Will the change in depreciation affect net income in the current year in the way that the CFO described?
How will it affect net income in the following year? Is the CFO correct when she claims that the change in estimated depreciation is allowed by GAAP? Who relies on the video company’s financial statements when making decisions? Why might their decisions be affected by the CFO’s proposed solution? Is it possible that their decisions would not be affected? What should you do?
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GEN CMB LL FND FINCL ACCT; CNCT 5 2016
- What Would You Do? You are responsible for preparing all of the journal entries for Regional Financial Services. You have correctly prepared the following entry for financial services provided on December 15: Your boss has asked you to change the date from December 15 to January 15 so that the business’s profit, and thus taxes, would be lower. Are you allowed to do this? What is your response to your boss? How should you handle this situation?arrow_forwardEthics 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_forwardACME Company sells computer components and plans on borrowing some money to expand. After reading a lot about earnings management, Bill, the owner of ACME, has decided he should try to accelerate some sales to improve his financial statement ratios. He has called his best customers and asked them to make their usual January purchases by December 31. Bill told the customers he would allow them, until the end of February, to pay for the purchases, just as if they had made their purchases in January. Explain if you think there are ethical implications of Bill’s actions. Which ratios will be affected, and how, by accelerating these sales? Please do not copy and paste from other websites.arrow_forward
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- Your friend, Dean McChesney, requested that you advise him on the effects that certain transactions will have on his business, A-Plus Travel Planners; Time is short, so you cannot journalize the transactions. Instead, you must analyze the transactions without a journal. McChesney will continue the business only if he can expect to earn a monthly net income of $6,000. The business completed the following transactions during June: McChesney deposited $10,000 cash in a business bank account to start the company. The company issued common stock to McChesney. Paid $300 cash for office supplies. Incurred advertising expense on account, $700. Paid the following cash expenses: administrative assistant’s salary, $1,400; office rent, $1,000. Earned service revenue on account, $8,800. Collected cash from customers on account, $1,200. Requirements Open the following T-accounts: Cash; Accounts Receivable; Office Supplies; Accounts Payable; Common Stock; Service Revenue; Salaries Expense; Rent…arrow_forwardJim Sandrolini is an accountant for a local manufacturing company. Jim's good friend, Dan Carruthers, has been operating a retail spporting goods store for about a year. The store has been moderately successful, and Dan needs a bank loan to help finance the next stage of his store's growth. He has asked Jim to prepare financial statements that the banker will use to help decide whether to grant the loan. Dan has proposed that the fee he will pay for Jim's accounting work should be contingent upon his receiving the loan. Required: What factors should Jim consider when making his decision about whether to prepare the financial statements for Dan's store?arrow_forwardSalt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants whichhas seen its revenue decline steadily over the past few years. The firm is looking toincrease its revenue and client base and so has developed a new advertising strategywhere it has guaranteed that its audits will minimise disruption to companies as theywill not last longer than two weeks.In addition, Salt & Pepper has offered all new audit clients a free accounts preparationservice for the first year of the engagement, as it is believed that time spent on the auditwill be reduced if the firm has produced the financial statements.The firm is seeking to reduce audit costs and has therefore decided not to update theengagement letters of existing clients, on the basis that these letters do not tend tochange much on a yearly basis.One of Salt & Pepper’s existing clients has proposed that this year’s audit fee should bebased on a percentage of their final pre-tax profit. The partners are…arrow_forward
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