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10 questions

Discuss the ethical and professional conduct of each scenario( First 5 Questions). Only has to be 2 to 3 sentences.

1. Cliff Hall opened Meridian Co. On January 1, 2009.At the end of the first year, the busi-

ness needed additional capital. On behalf of Meridian, Cliff applied to Federal National

Bank for a loan of $300,000.Based on Meridian financial statements, which had been pre-

pared on a cash basis, the Federal National Bank loan officer rejected the loan as too risky.

After receiving the rejection notice, Cliff instructed his accountant to prepare the fi-

nancial statements on an accrual basis. These statements included $48,500 in accounts receivable and $15,650in accounts payable. Cliff then instructed his accountant to record

an additional $20,000of accounts receivable for commissions on property for which a

contract had been signed on December 28, 2009, but which would not be formally

“closed” and the title transferred until January 5, 2010.

Cliff then applied for a $300,000loan from First City Bank, using the revised finan-

cial statements. On this application, Cliff indicated that he had not previously been re-

jected for credit.

The recording of revenue for $20000 is not correct because the event cannot be recorded on both the cash basis and the accrual basis because the event has not yet occurred. To record any event on accrual basis the event must have been here in case of contract the dutie must have been performed.

2. Web Books, Inc., provides accounting applications for business customers on the Web for

a monthly subscription. Web Books customers run their accounting system on the Web;

thus, the business data and application reside on the servers of Web Books, Inc.The se-

nior management of Web Books believes that once a customer begins to use Web Books

it would be very difficult to cancel the service. That is, customers are “locked in” because

it would be difficult to move the business data from Web Books to another accounting

application, even though the customers own their own data. Therefore, Web Books has

decided to entice customers with an initial low monthly price that is half of the normal

monthly rate for the first year of services. After a year, the price will be increased to the

regular monthly rate. Web Books management believes that customers will have to accept

the full price because customers will be “locked in” after one year of use.

a. Discuss whether the half-price offer is an ethical business practice.

Offering discounted prices is not ethically wrong but to offer lower prices at initial stages to lock in customer and then increasing prices suddenly because customers are bound to use service would be unethical.

b. Discuss whether customer “lock in” is an ethical business practice.

Locking in customers by providing high quality services would not be unethical but as in the above case where locking customers by taking advantage of their weakness would be unethical.

3. Ebba Co. is experiencing a decrease in sales and operating income for the fiscal year

ending December 31,2010.Cody Bryant, controller of Ebba Co., has suggested that all

orders received before the end of the fiscal year be shipped by midnight, December 31,

2010, even if the shipping department must work overtime. Since Ebba Co. ships all

merchandise FOB shipping point, it would record all such shipments as sales for the

year ending December 31, 2010, thereby offsetting some of the decreases in sales and

operating income.

Discuss whether Cody Bryant is behaving in a professional manner.

As the shipment is made before the end of the fiscal year and the policy is FOB shipping point then this would be professional because all the company polices and standards are followed

4. During the preparation of the bank reconciliation for New Concepts Co., Peter Fikes,

the assistant controller, discovered that City National Bank incorrectly recorded a $710

check written by New Concepts Co. as $170. Peter has decided not to notify the bank

but wait for the bank to detect the error. Peter plans to record the $540error as Other

Income if the bank fails to detect the error within the next three months.

Discuss whether Peter is behaving in a professional manner.

As peter knows that the error is made and he is not notifying the bank even though he is aware of the mistake and taking advantage of the error would be a very unprofessional act .

5. Esteban Appleby, CPA, is an assistant to the controller of Summerfield Consulting Co.

In his spare time, Esteban also prepares tax returns and performs general accounting

services for clients.Frequently, Esteban performs these services after his normal work-

ing hours, using Summerfield Consulting Co.’s computers and laser printers.

Occasionally, Esteban’s clients will call him at the office during regular working hours.

Discuss whether Esteban is performing in a professional manner.

As he is using the property of the company for his personal business this would be considered as unprofessional behavior

Discuss the Accounting decision being made using 2 to 3 sentences.

(Accrued expense)

1. On December 30, 2010, you buy a Ford Expedition. It comes with a three-year, 36,000-

mile warranty. On March 5, 2011, you return the Expedition to the dealership for some

basic repairs covered under the warranty. The cost of the repairs to the dealership is

$1,645. In what year, 2010or 2011, should Ford Motor Company recognize the cost of

the warranty repairs as an expense?

The ford motor would recognize he warranty expense in the year of sale that is 2010 and will record a warranty provision against it as the expenditure will incur the provision would be used .

(LIFO and Inventory)

2. The following is an excerpt from a conversation between Chad Lindy, the warehouse

manager for House of Foods Wholesale Co., and its accountant, Summer Roseberry.

Wholesale operates a large regional warehouse that supplies produce and other gro-

cery products to grocery stores in smaller communities.

Chad: Summer, can you explain what’s going on here with these monthly statements?

Summer: Sure, Chad. How can I help you?

Chad: I don’t understand this last-in, first-out inventory procedure. It just doesn’t make sense.

Summer:Well, what it means is that we assume that the last goods we receive are the first ones sold.

So the inventory is made up of the items we purchased first.

Chad:Yes, but that’s my problem. It doesn’t work that way! We always distribute the oldest produce first.

Some of that produce is perishable! We can’t keep any of it very long or it’ll spoil.

Summer: Chad, you don’t understand. We only assumethat the products we distribute are the last ones

received. We don’t actually have to distribute the goods in this way.

Chad: I always thought that accounting was supposed to show what really happened. It all sounds like

“make believe” to me! Why not report what really happens?

Respond to Chad’s concerns.

As this is the method which we use on the basis of our assumption if you want a method that will show the real picture then you can opt into the procedure of first in first out or weighted average method where the inventory is build in a sequence that matches with the purchases . the above mention methods are allowed by IAS and the LIFO method is obsolete.

(Financial vs. Tax Depreciation)

3. The following is an excerpt from a conversation between two employees of Quantum

Technologies, Pat Gapp and Faye Dalby .Pat is the accounts payable clerk, and Faye is

the cashier.

Pat: Faye, could I get your opinion on something?

Faye: Sure, Pat.

Pat: Do you know Julie, the fixed assets clerk?

Faye: I know who she is, but I don’t know her real well. Why?

Pat: Well, I was talking to her at lunch last Monday about how she liked her job, etc. You know, the usual...

and she mentioned something about having to keep two sets of books...one for taxes and one for the

financial statements. That can’t be good accounting, can it? What do you think?

Faye: Two sets of books? It doesn’t sound right.

Pat: It doesn’t seem right to me either. I was always taught that you had to use generally accepted ac-

counting principles. How can there be two sets of books? What can be the difference between the two?

How would you respond to Faye and Pat if you were Julie?

For the fixed assets the method of depreciation for financial statements may differ with that of tax system so two sets of books are required and the difference is recorded in financial statements through deferred taxation account

(Executive bonuses and accounting method)

4. Paul Sheile, the owner of Sheile Trucking Company, initiated an executive bonus plan

for his chief executive officer (CEO).The new plan provides a bonus to the CEO equal

to 3% of the income before taxes. Upon learning of the new bonus arrangement, the

CEO issued instructions to change the company’s accounting for trucks. The CEO has

asked the controller to make the following two changes:

a. Change from the double-declining-balance method to the straight-line method of

depreciation.

b. Add 50% to the useful lives of all trucks.

Why did the CEO ask for these changes? How would you respond to the CEO’s

request?

The ceo changes the method of depreciation because changing the methods will reduce the depreciation in the initial years and the depreciation expense will reduce thus the income before taxes will increase and the bonus for the ceo will increase.

As an assistant I would have to change the method because the IAS always allow to change the method of depreciation.

(Using the Statement of cash flow)

5. You are considering an investment in a new start-up company, Steamboat IQ Inc., an

Internet service provider. A review of the company’s financial statements reveals a neg-

ative retained earnings. In addition, it appears as though the company has been run-

ning a negative cash flow from operating activities since the company’s inception.

How is the company staying in business under these circumstances? Could

this be a good investment?

The company may have arranged the finance from either debt financing or equity financing to stay in the business.

The decision whether this would be a good investment or not would depend on the future prospects of the company to analyze the company in full much more data is required

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