Accounting Ethics Case 2 - Pitsa Johnson Accounting 201 Section 17 October 2007 Ethical Decision Making Case 2 Explanation of Ethical Issues 1

Accounting Ethics Case 2 - Pitsa Johnson Accounting 201...

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Pitsa Johnson Accounting 201 Section 17 October 2007 Ethical Decision Making: Case 2 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). 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. Lower of Cost or Market-GAAP requires that companies record inventory at the lower of either the originally recorded cost of the inventory or the cost to repurchase it (market value). This accounting principle goes hand-in-hand with the conservatism principle. Recording inventory—an asset—at the lower value will result in a lesser value for retained earnings and net income. Because these appear on the financial statements such as the balance sheet and income

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