1.) Health Corporation has several notes receivable reported as current assets on its year-end balance sheet.

While collection
seems certain, it may be delayed beyond one year. Because of this, the controller wants to reclassify these notes as noncurrent. Healths treasurer also thinks that collection will be delayed but does not favour reclassification because this will
reduce the current ratio from 1.5:1 to 0.8:1. This reduction in current ratio is detrimental to company prospects for securing a
major loan.

Should the controller reclassify the notes? Give your reasons.

Does the treasurers position pose an ethical dilemma for the controller? Explain your answer.
Answers:
Yes, the controller should reclassify the notes from current notes receivable to noncurrent notes receivable. Because
current assets are defined as assets that will be consumed or generate cash within one year, notes which cannot be
collected within one year should be classified as noncurrent investments.
If the notes are not classified, the current ratio will remain high enough to secure the major loan. Health Corporation
benefits, but the lending agency may be misled about the financial state of the company and its potential to meet the
conditions of its loan. Because both the controller and the treasurer recognize that delay of the collection has an
impact on the conflicting economic interests of Health and its lending agency, the decision to reclassify has ethical
dimensions.
If the treasurer insists that the notes not be re-classified, the controller will have to decide whether to accept the
treasurers decision, speak with higher-level executives at Health, or take some other action. Other actions may
include speaking to the audit committee, or to the chairman of the board of directors.
2.) The WGN Company has a bonus arrangement that grants the financial vice president and other executives a $15,000 bonus
if the net income exceeds the previous years by $1,000,000. Noting that the current financial statements report an increase of
$950,000 in the net income, Vice President Jack Brickhouse asks Louise Boudreau, the controller, to reduce the estimate of
warranty expense by $60,000. The present estimate of warranty expense is $500,000 and is known by both Brickhouse and
Boudreau to be a fairly "soft" amount.

Should Boudreau lower her estimate?

What ethical issue is at stake? Would anyone be harmed by the change in estimate?

Is Brickhouse acting ethically?

Answers:
No, the controller, Louise Boudreau, should not manipulate net income in view of any compensation plan the
company may have.
The economic interests of management and the potential for their bonus plans conflict with the shareholders
interest that financial statements clearly and accurately reflect net income. If the warranty expense is reduced and
the original estimate turns out to be accurate, the shareholders are harmed because the company pays a bonus the
managers did not earn.
No, Brickhouse is acting unethically. His action serves only his self-interest and has no clear basis in proper accounting
procedures.
3.) Shenandoah Furniture Company is a small publicly traded company. The Company pays annual bonuses based on a
percentage of net income. Randolph Hundley, the controller of Shenandoah Furniture Company, has noticed that the Company
holds equity securities in a variety of companies that were purchased as strategic investments.. A few of these securities are
currently valued above cost, but most are valued below cost at the current time. Hundley suggests to his assistant, Todd that
they should treat the securities with unrealized gains as trading securities and those with unrealized losses should be treated
differently with the unrealized losses being reported in other comprehensive income.

Will Hundleys suggestion, improve the companys net income (loss)?

Is there anything unethical about Hundleys suggestion?

Who are the stakeholders that would be affected by this decision?

Answers:
Yes, this will increase net income because unrealized gains will be recorded in net income and unrealized losses will
not be included in net income the losses will instead be reported in OCI.
Yes, it is unethical to select accounting policies based on what will serve managements best interests. If only
securities with an inherent gain are reported as trading securities, management is increasing net income and, as a
result, bonuses for the year. Financial information should be neutral.
The affected stakeholders are other members of the companys officers and directors, the independent auditors, the
shareholders, and prospective investors.

4.) The HVAC Company specializes in the installation of heating, ventilation, and air conditioning in large projects such as
domed stadiums, military bases, airports, and multi-storied buildings. Its contracts usually take two to three years to complete
and, at any fiscal year end, this percentage of work completed represents a sizable percentage of its assets. The company is
privately held and has a senior management group whose compensation is based almost entirely on the earnings results for the
year. As the CFO, you have been reviewing the year-end estimated percentage of completion figures, which have been provided
to you by the project managers responsible for the completion of the various contracts.
This year has not been as successful or as active as previous ones, and the two senior founders of the company have asked you
to bring in a net income figure at least equal to the last couple of years. In your mind you know that the project managers
estimates are somewhat fluid, and you have been contemplating making the requested adjustments.

How would you handle the request of the two senior partners?
Answers:
Where there is a high degree of estimation, as is the case with percentage of completion, there is also much room for
discussion, disagreement, and undue influence to be brought to light. This is especially the case when there is no
reliable or easily identified benchmark upon which to measure or base your estimates. (For example, miles paved-todate as a percentage of total miles to be completed under the contract.) Professional judgement and integrity are
certainly challenged in situations of this nature.
The CFO would first go back and review the process and basis upon which the project managers have reached their
conclusions. There should be consistency in the approach, as these contracts take several fiscal periods to complete.
There would be an evaluation on the part of the CFO of the experience, knowledge, and skill of the individual
managers to obtain some comfort with the reliability of the opinion.
There is no perfect or easy solution to a situation such as this. The CFO has, however, a professional obligation to
ensure that, in his professional judgement, the final results are presented fairly and in accordance with generally
accepted accounting principles.