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Chapter 24: 12CA_a (page 1457)

In June 2017, the board of directors for McElroy Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Jennifer Grayson, treasurer for McElroy Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs the cash, but she is worried that if the bonds are issued before the company鈥檚 year-end (December 31, 2017) the additional liability will have an adverse effect on a number of important ratios. In July, she explains to company president William McElroy that if they delay issuing the bonds until after December 31 the bonds will not affect the ratios until December 31, 2018. They will have to report the issuance as a subsequent event which requires only footnote disclosure. Grayson expects that with expected improved financial performance in 2018, ratios should be better.

Instructions

(a) What are the ethical issues involved?

Short Answer

Expert verified

The ethical issue involved in the Profitability and integrity of financial reporting.

Step by step solution

01

Meaning of Accounting Ethics

Accounting ethics refers to adhering to particular norms and principles established by regulatory authorities that every individual involved in accounting should adhere to in order to prevent abuse of financial information or their managerial position.

02

Explaining the Ethical issues involved in the statements

The ethical issues involved are profitability, long-term versus short-term performance, and integrity of financial reporting.

Real profitability requires a long-term outlook. It is impossible to fully assess success in a quarter of a year; it takes longer for a product or service to find its market and gain traction against competitors, or for the results of a new corporate policy to become apparent.

Financial reporting and analysis are essential to the performance and well-being of any company or organization. For accurate reporting and analysis, the ethics of the company or organization comes into play.

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Most popular questions from this chapter

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn鈥檚 cash flow problems are due primarily to the company鈥檚 desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets

2018

2017

Cash

\) 18,200

\( 12,500

Notes receivable

148,000

132,000

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & Equipment (net of depreciation)

1,449,000

1,420,500

Total assets

\)1,852,000

\(1,740,500

Liabilities and Stockholders鈥� Equity

Accounts payable

\) 79,000

\( 91,000

Notes payable

76,000

61,500

Accrued liabilities

9,000

6,000

Common stock (130,000 shares, \)10 par)

1,300,000

1,300,000

Retained earnings*

388,000

282,000

Total liabilities and stockholders鈥� equity

\(1,852,000

\)1,740,500

*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue

\(3,000,000

\)2,700,000

Cost of goods sold*

1,530,000

1,425,000

Gross margin

1,470,000

1,275,000

Operating expenses

860,000

780,000

Income before income taxes

610,000

495,000

Income taxes (40%)

244,000

198,000

Net income

\( 366,000

\) 297,000

Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

(a).Compute the following items for Bradburn Corporation.

3. Inventory turnover for fiscal year 2018.

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment
Total Revenue
Operating Profit (Loss)
Identifiable Assets
W
 \( 60,000
15,000
\)167,000
X
 10,000
 3,000
 83,000
Y
 23,000
 (2,000)
 21,000
Z
 9,000
 1,000
 19,000

\(102,000
\)17,000
$290,000

Instructions

Determine which of the operating segments are reportable based on the:

c) Identifiable assets test.

Explain the meaning of the following terms: (a) common size analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich鈥攂ut, rats!, even recourse to the Freedom of Information Act didn鈥檛 help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole鈥攂ut no one was very eager to salute. Even after some of the more objectionable features鈥攃ompulsory corrections and detailed explanations of why the estimates went awry鈥攚ere peeled off the original proposal.

Seemingly, despite the Commission鈥檚 smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a 鈥淪afe Harbor鈥� rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. Why are corporations concerned about presenting profit forecasts?

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor鈥檚 motives, hesitates to suggest to Tercek that the company鈥檚 improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. Should Lilly, the controller, remain silent? Give reasons.
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