CASE IN TECHNICAL AND ETHICAL ISSUES OF FINANCIAL ACCOUNTING

ACT 2200 PROJECT: CASE IN TECHNICAL AND ETHICAL ISSUES OF FINANCIAL ACCOUNTING

For the following real world accounting case, you will provide a Case Analysis from the perspective of the Accountant that analyzes both the technical and ethical accounting issues present in the case and proposes a solution based on these considerations. 

BE SURE
to read the instructions below the case thoroughly, as they lay out exactly what is required.  Also, it is IMPERATIVE that you read the accompanying rubric, on which your project grade will be based, so that you understand the exact expectations set forth to achieve a high score. 

Keep in mind that I am looking for a WELL-WRITTEN, PROOFREAD, WELL-ORGANIZED, HIGH QUALITY report that shows a thorough understanding of the accounting issues faced.  The report has no specific length requirement as long as you are sure to address all considerations of case.  Also, be sure to turn it in with the COVERSHEET below!

CASE INFORMATION: ALL STAR INSURANCE COMPANY

You are an accountant for the Fort Lauderdale regional office of All Star Insurance Company.  Tom Tall, your boss, is the operating manager of this office.  As the manager, his pay package includes a base salary, commissions, and a bonus when his region has net income in excess of the budgeted amount.  Tom has been under enormous pressure lately, stemming largely from two factors.  First, he is experiencing mounting personal debt due to hospital bills of a sick family member.  Second, compounding his worries, net income is dipping below the budgeted amount for the first time in years.

You have been working for Tom for five years, and like everyone else in the office, you consider yourself lucky to work for such a supportive boss.  You also feel great sympathy for his personal problems over the last few months.  In your position as accountant for the regional office, you are very aware of the drop in net income and the impact this will have on the Tom’s bonus.  While you are working on the year-end financial statements, Tom stops by your office.

Tom asks you to change the manner in which you are planning to account for wages expense incurred at the end of the year.  Although employees worked for the company to generate insurance sales during the last week of the year, the related paychecks for this last week do not go out until after the first week of the next year.  Originally, you planned to record the wages expense related to this last week this year, and settle the related amount when cash is paid next year.  But when Tom approaches you, he says, Hey, we don’t pay these employee wages until next year, so why not wait to record the expense until then?  I never did understand why you accountants are so picky about these things anyway.  I’d like you to change the way you record this transaction.  Instead, I want you to recognize the wages expense next year and leave it out of this year, which will help boost this year’s net income.  And anyway, I’ve done favors for you in the past, and I am asking for such a small thing in return. With that, he leaves your office.

Instructions:

Technical:
In a thorough Case Analysis, first analyze the technical accounting issue here by identifying and explaining the effects of both transaction alternatives (the original way and the way proposed by Tom) on the overall Accounting Equation (on both specific accounts and on overall assets, liabilities, and stockholders’ equity), and on both the Income Statement and Balance Sheet (on specific accounts and on overall net income and on assets, liabilities, and stockholders’ equity).  Then, explain how these Income Statement and Balance Sheet effects of both alternatives would be perceived by specific financial statement users, being sure to address their specific uses and related perception effects.

Ethical:
Then, explain why or why not you, the Accountant in this case, are faced with an ethical dilemma, describing the nature of any internal conflict you may be facing and the difficulty you may have making a decision given this conflict.  Secondly, identify and explain any potential parties (including Tom and yourself) who could be impacted by your decision, and how these considerations affect your ethical dilemma.

Recommendation:
Lastly, based on these considerations, recommend and justify the course of action you would take as the Accountant in this case, making sure you cite the specific technical and ethical considerations that led you to this decision.

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