Inc Deter Actions 4 Discussion Cases
I have 4 discussion cases, each case has few questions that need to be answered as a paragraph (7 to 10 sentences).
Case A. Brent Robertson and his banker were reviewing the quarterly income statements for his consulting business, Robertson and Associates, Inc. The banker was impressed with the growth of sales revenue and net income for the second quarter of this year compared with the second quarter of last year. Brent knew it had been a good quarter, but he didn’t think it had been spectacular. Suddenly, Brent realized that he failed to close out the revenue and expense accounts for the prior quarter, which ended in March. Because those temporary accounts were not closed out, their balances were included in the second quarter amounts for the current year. Brent then realized that the banker had the financial statements but not the general ledger or any trial bal-ances. Thus, the banker would not be able to see that the accounting cycle from the first quarter was not properly closed and that this failure was creating a misstated income statement for the second quarter of the current year. The banker then commented that the business seemed to be performing so well that he would approve a line of credit for the business. Brent decided to not say anything because he did not want to lose the line of credit. Besides, he thought, it really did not matter that the income statement was misstated because his business would be sure to repay any amounts borrowed. Should Brent have informed the banker of the mistake made? Should he have redone the
second quarter’s income statement? Was Brent’s failure to close the prior quarter’s revenue and expense accounts unethical? Does the fact that the business will repay the loan matter?
Case B. Rob Peterson works as a salesperson at Consolidated Systems, Inc. In addition to a base monthly salary, Rob receives a commission based on the amount of sales he makes during the month. Rob was hoping to have enough money for a down payment on a new car, but sales have been low because of a downturn in the economy. Rob was aware that Consolidated Systems, Inc., granted credit terms of 2/10, n/30 to its credit customers. In addition, Rob knew that Consolidated Systems, Inc., had a “no questions asked” return policy. Based on this knowledge, Rob had an idea. He contacted a regular customer and convinced the customer to purchase a substantial amount of merchandise so that he could earn the commission on the sale. Rob explained to the customer that he would not have to pay for the goods for 30 days and that he could return part, or all, of the goods before paying for them. However, Rob asked the customer not to return any of the goods until the following month to ensure that he would earn the full commission.
1. Do you feel Rob acted unethically? Why or why not? 2. How can Consolidated Systems, Inc., deter actions like Rob’s?
Case C. Susan Hopkins recently went to work for RJ Enterprises as the accounting manager. At the end of the year, Bill Harrison, the CEO, called Susan into his office for a meeting. Mr. Harrison explained to Susan that RJ Enterprises was in the midst of obtaining a substantial cash investment from a major investor. Mr. Harrison said he was concerned that the investor would decide not to invest in RJ Enterprises when it saw the current year’s results of operations. Mr. Harrison then asked Susan to revise the current year’s financial statements by increasing the value of the ending inventory in order to decrease cost of goods sold and increase net income. Mr. Harrison tried to reassure Susan by explaining that the company is undertaking a new advertising campaign that will result in a significant improvement in the company’s income in the following year. Susan is concerned about the future of her job, as well as others within the company, if the company does not receive the investment of cash.
What would you do if you were in Susan’s position? 2. If Susan increases the value of the current year’s ending inventory, what will be the effect on the following year’s net income?
Case D. Assume you were recently hired as a staff accountant for Advanced Energy Solutions, Inc. You report to Tina, the director of financial reporting, who in turn reports to the CFO. One of your first assignments is to prepare the adjusting entries for the end of the second quarter and to draft the income statement. Tina instructs you to let her know as soon as you have the estimated earnings for the quarter. She says she will need to review the adjusting entries and earnings cal-culation with the CFO. After reviewing your work with the CFO, Tina tells you to change the entry that you recorded
for depreciation expense on the company’s fleet of trucks from $234,000 to $194,000. At first, you thought that you must have made some mistake in calculating the amount of depreciation, so you recheck your calculations. Surprisingly, you come up with the same amount again. So, tactfully, you ask Tina for an explanation for the change. She tells you that depreciation is only an estimate and that the CFO will change his mind about estimates based on earnings.
1. What is the effect of the change in the amount of the depreciation expense on the company’s second-quarter earnings?
2. What is the ethical dilemma you face? 3. What alternatives might you consider, and what are the potential consequences of each alternative?
4. What are some of the common excuses used to rationalize unethical behavior?