ACC 205: Week 1 Discussion - Ethical Issues in Financial Reporting
Discussion on ethical issues in financial reporting.
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ACC 205: Week 1 Discussion - Ethical Issues in Financial
Reporting
ACC 205 WEEK 1 DQ 1
Ethical Issue 1-1 - Xiaping Trading Company
Ethical Issue 1-1 The board of directors of Xiaping Trading Company is meeting to
discuss the past year's results before releasing financial statements to the bank. The
discussion includes this exchange:
Wai Lee, company owner: “This has not been a good year! Revenue is down and expenses
are way up. If we are not careful, we will report a loss for the third year in a row. I can
temporarily transfer some land that I own into the company's name, and that will beef up
our balance sheet. Brent, can you shave $500,000 from expenses? Then we can probably
get the bank loan that we need.”
Brent Ray, company chief accountant: “Wai Lee, you are asking too much. Generally
accepted accounting principles are designed to keep this sort of thing from happening.”
Requirements
1. What is the fundamental ethical issue in this situation?
2. How do the two suggestions of the company owner differ?
Ethical Issue 1-1
Req. 1
The fundamental ethical issue in this situation is letting the financial statements tell the
truth about the company’s performance and financial position. There are two specific
items to address. First of all, transferring the land violates GAAP because it is a sham
transaction that is not at arm’s length. The second issue is that of “shaving expenses.” If by
“shaving” is simply meant reducing expenses, this is not a problem. If it means
reclassifying expenses in an effort to boost net income, it is false and dishonest.
Reporting
ACC 205 WEEK 1 DQ 1
Ethical Issue 1-1 - Xiaping Trading Company
Ethical Issue 1-1 The board of directors of Xiaping Trading Company is meeting to
discuss the past year's results before releasing financial statements to the bank. The
discussion includes this exchange:
Wai Lee, company owner: “This has not been a good year! Revenue is down and expenses
are way up. If we are not careful, we will report a loss for the third year in a row. I can
temporarily transfer some land that I own into the company's name, and that will beef up
our balance sheet. Brent, can you shave $500,000 from expenses? Then we can probably
get the bank loan that we need.”
Brent Ray, company chief accountant: “Wai Lee, you are asking too much. Generally
accepted accounting principles are designed to keep this sort of thing from happening.”
Requirements
1. What is the fundamental ethical issue in this situation?
2. How do the two suggestions of the company owner differ?
Ethical Issue 1-1
Req. 1
The fundamental ethical issue in this situation is letting the financial statements tell the
truth about the company’s performance and financial position. There are two specific
items to address. First of all, transferring the land violates GAAP because it is a sham
transaction that is not at arm’s length. The second issue is that of “shaving expenses.” If by
“shaving” is simply meant reducing expenses, this is not a problem. If it means
reclassifying expenses in an effort to boost net income, it is false and dishonest.
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Document Details
University
National University
Subject
Accounting