To determine where there are ethical issues, in this case, we need to understand the motive of the decision. According to the case, the vice president argues that the new standard will negatively affect the reported profits. Based on his argument, an ethical issue arises because the reported income will not reflect the true and fair view of the company. However, it can also be argued that his advice is ethical because the standards apply the current period and not the historical time in which the income is reported (Berry, 2011; Schroeder, Clark, Cathey, & Schroeder, 2014).
The vice president acted improperly
Hoger does not gain from early implementation however he feels that the books should display a true and fair view of the company. Additionally, early application will offer an opportunity for the company to adjust its reporting in line with the new standards. Similarly, it will streamline processes for the preparation of financial statements for the current year (Berry, 2011; Schroeder, Clark, Cathey, & Schroeder, 2014).
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Potential investors would be affected by the decision against an early implementation of the standards because they are likely to invest their cash in the company based on the declared results using the old standards that reported higher incomes only for the income to reduce the following year which might also affect the stock price. Delay in implementation may benefit an existing stock holder who desires to sell their stock before the new standards are implemented (Berry, 2011; Schroeder, Clark, Cathey, & Schroeder, 2014).
Case 8-6
The allowance method of credit sales matches bad debts with the sales generated revenues in a period and in this case, it focuses on the income statement. From the case, an allowance method based on the balance in trade receivables values accounts receivables at the closing date for their future collectible amounts and therefore its attention is on the statement of financial position. However, both techniques are acceptable under GAAP (Ittelson; 2009; Shim, Siegel, & Shim, 2012).
On the closing date of its financial year, Carme records on its balance sheet the value of the accounts receivables less the allowance for bad debts. Bad debt expenses are accounted for as a general expense in the income statement or as selling expenses or can be subtracted from the sales value to arrive at net sales (Berry, 2011; Schroeder, Clark, Cathey, & Schroeder, 2014).
References
Berry, L. E. (2011). Financial accounting demystified . New York, NY: McGraw-Hill.
Ittelson, T. R. (2009). Financial statements: a step-by-step guide to understanding and creating financial reports . Franklin Lakes, NJ: Career Press.
Schroeder, R. G., Clark, M., Cathey, J. M., & Schroeder, R. G. (2014). Financial accounting theory and analysis: text and cases . Hoboken, NJ: Wiley.
Shim, J. K., Siegel, J. G., & Shim, J. K. (2012). Financial accounting . New York: McGraw-Hill.
