Additional Ethics Cases
Ethics Case 1
Health Corporation has several current notes receivable on its year-end
balance sheet. While collection seems certain, it may be delayed beyond
one year. Because of this, the controller wants to re-classify these notes
as non-current. Health's treasurer also thinks that collection will be
delayed but does not favor re-classification because this will reduce
the current ratio from 1.5:1 to .8:1. This reduction in current ratio
is detrimental to company prospects for securing a major loan.
Instructions
Answer the following questions:
- Should the controller re-classify the notes? Give your reasons.
- Does the treasurer's position pose an ethical dilemma for the controller? Explain your answer.
Ethics Case 2
The WGN Company has a bonus arrangement, which grants the financial
vice president and other executives a $15,000 bonus if the net income
exceeds the previous year's by $1,000,000. Noting that the current
financial statements report an increase of $950,000 in the net income,
Vice President Jack Brickhouse asks Louise Boudreau, the controller,
to reduce the estimate of warranty expense to $60,000. The present
estimate of warranty expense is $500,000 and is known by both Brickhouse
and Boudreau to be a fairly "soft" amount.
Instructions
Answer the following questions:
- Should Boudreau lower her estimate?
- What ethical issue is at stake? Would anyone be harmed by the change in estimate?
- Is Brickhouse acting ethically?
Ethics Case 3
Randolph Hundley, the controller of Shenandoah Furniture Company, and
Todd, his assistant, are preparing the year-end financial statements.
Todd wants to disclose the cost of available-for-sale securities as
a parenthetical note on the balance sheet. Hundley concerned about
the decline in market value compared the cost of these securities
does not want to call attention to this decline. He wants to "bury"
the cost information in a note to the financial statements.
Instructions
- What ethical issue is posed by the choice between these two forms of disclosure?
- Are the interests of different stakeholders in conflict in the choice between the two methods of accounting reports?
- Which method would you choose and why?
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