Rationale for $180,000 uncollectible allowance
The basis for calculating the $180,000 is based on the prevailing accounting principle that xyz industries use. There are four main principles used in financial accounting measurement, objectivity, revenue recognition, matching and consistency. The matching concept states that revenues should be matched with the expenses incurred in making the revenues for a given accounting period (Cooper, 2019 p 336). In that regard, aging of debtors is categorized depending on the time period that debtors have taken without paying which might be based on the past historical experiences. The accountant at xyz may have established that debts that go past 120 days without being paid have 87% chances of being paid. The remaining 13% that is in in doubt is accounted for by creating provisions of bad debts. The accounting entries to record this information may be summarized as
DR: bad debt expense account
CR: allowance for doubtful accounts
Impact of misstatement on financial statement
The financial misstatements have direct and proportionate impact on the income statement and the balance sheet. Increase in the amount allocated for provisions decreases the amount of profits in the income statement. That is because provisions are classified as expenses. In the case of xyz industries, the amount that should be recognized at the end of the accounting period is $180,000, but the controller wants the amount changed to $135,000. That means that the amount of provisions have reduced by $45,000 ($180,000-$135,000), which correspondingly increases profits by the same amount. The impact of the misstatement on the balance sheet is that assets will increase by $45,000 because net account receivables have increased following the issuance of a new invoice.
Ethical dilemma
I face the ethical dilemma between standing with the professional requirements and respecting authority in my workplace. On one hand, I am required to follow what the supervisor tells me because I work under his command. On the other hand, I need to discharge my duties while guided by professional code of conduct such as observing integrity and truthfulness. Altering the documents in line with my supervisor is not truthful at all. My responsibility as a financial controller is to prepare financial statements from documents of original entry such as receipts, invoices, bills, checks among others. I have been asked to issue a new invoice with a revised date, yet there are no actual goods (receivables) or services that have been rendered. The ethical considerations at hand are that the statements will have material misstatements, which might influence the economic decisions of investors. The misstatements will be ‘misleading’ to people who rely on them to make decisions. The options I have as a controller is to prepare financial statements that are accurate in amounts and dates or comply with the supervisor to prepare statements that are deceitful in amounts and dates.
Negative impacts of not following instructions of the supervisor
Xyz has two key categories of stakeholders; the external and the internal stakeholders. Internal stakeholders are such as employees, the management, the board of directors and the key investors. External stakeholders are such as creditors, the government, customers, general investors and competitors. The negative impacts that result for not following the supervisor’s instructions are that the management may be laid off for not ‘working hard enough’ to generate the adequate returns for investors. The management is tasked with the duty of ensuring that the business makes enough profits to grow the investor’s equity. Such pressures prompt management to engage in dishonest dealing and cooking financial statements to appear profitable in books while in reality it is not.
Consequences of Complying
The possible consequences of complying with the supervisor’s instructions are that prospective investors who want to invest in xyz will make misinformed decisions as they will rely on financial statements that have material misstatements. Xyz is publically held, implying that its shares are traded in the stock exchange market. Investors look at the financial soundness and performance of a company when making investment decisions. In the event of liquidation or bankruptcy, investors are likely to lose their investments because the relied on misstated financial statements whereby xyz is presented as operating profitably in books while practically it is not. I will also be affected for breaching the code of conduct required of accountants on integrity.
The basis for calculating the $180,000 is based on the prevailing accounting principle that xyz industries use. There are four main principles used in financial accounting measurement, objectivity, revenue recognition, matching and consistency. The matching concept states that revenues should be matched with the expenses incurred in making the revenues for a given accounting period (Cooper, 2019 p 336). In that regard, aging of debtors is categorized depending on the time period that debtors have taken without paying which might be based on the past historical experiences. The accountant at xyz may have established that debts that go past 120 days without being paid have 87% chances of being paid. The remaining 13% that is in in doubt is accounted for by creating provisions of bad debts. The accounting entries to record this information may be summarized as
DR: bad debt expense account
CR: allowance for doubtful accounts
Impact of misstatement on financial statement
The financial misstatements have direct and proportionate impact on the income statement and the balance sheet. Increase in the amount allocated for provisions decreases the amount of profits in the income statement. That is because provisions are classified as expenses. In the case of xyz industries, the amount that should be recognized at the end of the accounting period is $180,000, but the controller wants the amount changed to $135,000. That means that the amount of provisions have reduced by $45,000 ($180,000-$135,000), which correspondingly increases profits by the same amount. The impact of the misstatement on the balance sheet is that assets will increase by $45,000 because net account receivables have increased following the issuance of a new invoice.
Ethical dilemma
I face the ethical dilemma between standing with the professional requirements and respecting authority in my workplace. On one hand, I am required to follow what the supervisor tells me because I work under his command. On the other hand, I need to discharge my duties while guided by professional code of conduct such as observing integrity and truthfulness. Altering the documents in line with my supervisor is not truthful at all. My responsibility as a financial controller is to prepare financial statements from documents of original entry such as receipts, invoices, bills, checks among others. I have been asked to issue a new invoice with a revised date, yet there are no actual goods (receivables) or services that have been rendered. The ethical considerations at hand are that the statements will have material misstatements, which might influence the economic decisions of investors. The misstatements will be ‘misleading’ to people who rely on them to make decisions. The options I have as a controller is to prepare financial statements that are accurate in amounts and dates or comply with the supervisor to prepare statements that are deceitful in amounts and dates.
Negative impacts of not following instructions of the supervisor
Xyz has two key categories of stakeholders; the external and the internal stakeholders. Internal stakeholders are such as employees, the management, the board of directors and the key investors. External stakeholders are such as creditors, the government, customers, general investors and competitors. The negative impacts that result for not following the supervisor’s instructions are that the management may be laid off for not ‘working hard enough’ to generate the adequate returns for investors. The management is tasked with the duty of ensuring that the business makes enough profits to grow the investor’s equity. Such pressures prompt management to engage in dishonest dealing and cooking financial statements to appear profitable in books while in reality it is not.
Consequences of Complying
The possible consequences of complying with the supervisor’s instructions are that prospective investors who want to invest in xyz will make misinformed decisions as they will rely on financial statements that have material misstatements. Xyz is publically held, implying that its shares are traded in the stock exchange market. Investors look at the financial soundness and performance of a company when making investment decisions. In the event of liquidation or bankruptcy, investors are likely to lose their investments because the relied on misstated financial statements whereby xyz is presented as operating profitably in books while practically it is not. I will also be affected for breaching the code of conduct required of accountants on integrity.
