Professional Documents
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CONSIDERATIONS
Case Study: First Mates Wholesale Boating
Supply Company: Do or Dont?
Accounting 2540
Tammy Cooley
Mindy Hardisty
Tara Schiff
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Hank, the back-office guru, pipes in with a terrible suggestion. He informs everyone that
he has been preparing to ship a fairly large shipment to a southwest network of marinas for
them to inspect in the hopes that they will choose to carry some or all of their products. Hank
says, We have been trying to sign them as an ongoing customer for months, Im pretty sure
theyll like what they see, so I feel comfortable booking those shipments as sales. This is very
unethical and is a bad business decision all around. Pretty sure, doesnt cut it in financial
reporting. The first step in applying the core revenue recognition principle is to identify the
contract. There was no real contract in place at the time of shipment. The marinas did not place
the order and there was no obligation that they accept the products. Therefore, these products
do not qualify to be recognized as revenue. Secondly, by booking the sales on these shipments
the company could be opening up another round of playing catch-up. As Hank stated, By the
time we touch base with them, answer any questions they have, and reconnect to get their
decisions, itll be next quarter, and well worry then about any returns and/or disinterested
outcome. It sounds to me that Hank is not so sure about this potential customer and the
company will be returning the product in the following quarter anyway. This is not a sound
business decision any way you look at it.
Molly Jackson, who handles the financial accounting for the deep sea business unit,
offered several different ideas that she thought would be easy and legitimate. She first
proposed that they relax their credit screening for new customers to help expand their
customer base. This suggestion could be a great benefit in increasing their customer base and,
in turn, increasing their potential sales. Relaxing the credit screening is completely ethical,
however, the company will want to consider the impact this will have on the quality of their
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accounts receivables. Accounts receivables are an essential part of the companys cash flow and
it is important that they are offset by an allowance for uncollectible accounts that is as accurate
as possible. Relaxing the credit screening, but not increasing the allowance account will
eventually have a negative impact on future revenues as a larger percentage of customers
default on their payments and the collections have to be written off. Therefore, this suggestion
is not completely ethical.
The second suggestion made by Molly was to lengthen the period of time over which
the company depreciates their buildings and vehicles to twice as long. This is an unethical
suggestion and a horrible idea generally speaking. This could be disastrous decision. By doing
this the depreciation expense would be lower, but when the building or vehicles need to be
replaced because they are no longer useful, the amount those assets are valued on the books
would be inflated above the actual value at fair market. The company would have to take a loss
for the difference in these amounts in the year they disposed of those assets. GAAP states that
buildings and vehicles should be depreciated over the useful life of the property. Also, the
company would have to include justification for their decision to make a change in estimate
regarding depreciation in the notes to their financial statements. Auditors would not find their
reasoning of wanting to lower depreciation expense that year as valid justification.
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pushed some of last years profit into this year. This added a little cushion so their unit wasnt
struggling as much this year as the lake boating unit, at least on paper.
The first action Arthurs team took was deciding to prepay some expenses in the prior
year that would be incurred for this years major trade show. These costs were not treated as
prepaid expenses on the balance sheet and then expensed at the time of the trade show, but
rather, they were journalized as expenses in the prior year, thus lowering the net profit. Not
only was this action not ethical, it was in violation of generally accepted accounting principles
(GAAP) regarding the timing of revenue and expense recognition, known as the matching
principle. The effect was that expenses were lower this year which artificially increased net
income in the deep sea fishing unit this fiscal year.
Another action Arthurs team took was to substantially and temporarily increase the
uncollectible accounts receivable reserve last year. Since this is a contra account to accounts
receivable, it made it appear the company would collect less money due to an increase in the
default rate on customer payments. This falsely lowered the amount of revenue that was
recorded in the prior year, which had the ultimate effect of lowering net income. They further
complicated their situation by reversing some of the reserve last quarter. Therefore, revenue
was increased last quarter essentially by revenues that were actually earned last year, but had
gotten buried in the reserve account. This is a manipulation of net income and also violates
GAAP by not recognizing revenue in the period that it was earned, again part of the matching
principle.
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Accounting Professionals
FMWBS has a strong team in place with a unified goal of continued success for the
company. Many team members are quick to offer suggestions that would enable the company
to reach its year-end financial bottom line target. Several ideas shared were worthwhile and
would provide the company an honest likelihood of achieving success. However, these actions
should never have a shoot from the hip feel and should not be taken lightly. Whether it be due
to a lack of accounting knowledge, the sheer desire to do whatever it takes, or a combination
of the two, unethical actions will ultimately lead to undesirable results. Any steps taken can and
will have long term effects for those involved including demotion or loss of employment,
difficulty in future employment, loss of peer respect in the workplace, or in the most extreme
of cases, complete failure of the company in question.
One way accounting professionals can help employers, co-workers, and subordinates
understand how to practice ethical behavior in financial reporting is to implement a strong set
of policies and procedures within the company. It does not appear that the company has been
through an independent audit in years past. With the company now controlled by investors,
they may require this going forward on a yearly basis. Having an independent audit in place
would provide more accountability by the executive team members and the accounting
department and motivation to follow policies and procedures that keep the company on an
ethical and productive path.
Financial accounting has increased in complexity significantly over the last few decades
and proper procedure can easily be missed. As professionals, the need for continuing education
is a must. While the grey area in accounting seems to have broadened, following the
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conservatism principle and erring on the side of caution will generally reduce the risk of
violating GAAP standards. It is important that accounting policies and procedures are clearly
communicated to decision makers. This can be accomplished through written policy binders,
oral presentations, online communication, and other methods. Providing training sessions in
basic accounting principles and ethical decision making for executive team members would also
have a positive impact. As laws change and complexity increases, accounting professionals
should do their best to make sure leaders are aware of the implications and how it can affect
their business. When ethical behavior is incorporated into the company culture; employees,
customers, investors, and business owners are all benefitted in the long run.
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