Question:Applying ethical standards

Natalia Wallace is the new controller for Smart Software, Inc. which develops and sells education software. Shortly before the December 31 fiscal year-end, James Cauvet, the company president, asks Wallace how things look for the year-end numbers. He is not happy to learn that earnings growth may be below 13% for the first time in the company’s five-year history. Cauvet explains that financial analysts have again predicted a 13% earnings growth for the company and that he does not intend to disappoint them. He suggests that Wallace talk to the assistant controller, who can explain how the previous controller dealt with such situations. The assistant controller suggests the following strategies:

a. Persuade suppliers to postpone billing \(13,000 in invoices until January 1.

b. Record as sales \)115,000 in certain software awaiting sale that is held in a public warehouse.

c. Delay the year-end closing a few days into January of the next year so that some of the next year’s sales are included in this year’s sales.

d. Reduce the estimated Bad Debts Expense from 5% of Sales Revenue to 3%, given the company’s continued strong performance.

e. Postpone routine monthly maintenance expenditures from December to January.

Requirements

1. Which of these suggested strategies are inconsistent with IMA standards?

2. How might these inconsistencies affect the company’s creditors and stockholders?

3. What should Wallace do if Cauvet insists that she follow all of these suggestions?

Step by step solution

01

Step-by-Step SolutionStep 1: Suggested strategies are inconsistent with IMA standards

The strategies that are inconsistent with IMA standards are strategies are part a, b and c. As the delay in recording the invoice, delaying year-end closing of accounts, and the recording of sales that are not yet sold.

02

Creditors and stockholders are affected

The inconsistencies impact the financial statement information provided:

The decisions will lead to believe the operating performance of the company is better than it really is. The misinterpretation may result in the investors selling stock when they may have held it with correct information.

Similarly, creditors may grant credit to the company with the false information when they do not grant credit with the proper information.

03

Wallace should do

The controller of the company should resist the attempt of the President of the business to implement the decisions given in parts a, b and c. The controller should gather more information about the decision d. If the president ignores it, then the controller should look for a better company to work in.

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