Accounting Ethics Case 3 - Pitsa Johnson Accounting 201 Section 27 November 2007 Ethical Decision Making Case 3 Explanation of Ethical Issues 1

Accounting Ethics Case 3 - Pitsa Johnson Accounting 201...

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Pitsa Johnson Accounting 201 Section 27 November 2007 Ethical Decision Making: Case 3 Explanation of Ethical Issues: 1. Conservatism-in financial accounting it is preferable to be pessimistic and understate assets and revenues and overstate liabilities. Understating and overstating assets/revenues and liabilities respectively results in an understated value for retained earnings, (which appears on the balance sheet and statement of retained earnings) and net income (which appears on the income statement and statement of retained earnings as well as cash flow statement). Many people inside and outside of the company, including owners, business managers, regulators, investors, and creditors rely on information reported on these financial statements. If the conservatism principle is not followed, the retained earnings and net income will be recorded too high which would mislead the aforementioned parties in the well-being of the company. 2. Taking advantage of loop holes-There are many loop holes in reporting financial statements such as the cash flows statement which make it easy to lie about the current financial status of a company. Even taking these loop holes into consideration when preparing financial statements is unethical. The statements should be prepared with the facts of the finances of a company, not altered to make the financial statements pretty or fitting to the desires of company management. 3. Reporting cash flows as assets or expenses-Accountants know that if the object in question has no benefit to future periods, its cost should be reported as an expense. If the

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