Ethical Case - Related to Accounting Principles & Adjusting Entries - Essay Example

Ethical case Task Introduction This paper presents an analysis of J’s wedding production case study. The company has the plan to expand in the future. The company could borrow funds worth $ 200,000 from the Bank of East Asia. However, in order to qualify for the loan, the bank prefers the company to maintain a minimum current ratio of 1.5. The continued increase in the market competition has led to the rise in the cost of promotional activities, thus, reducing the profit margin of various entities.

The end year balance sheet of J’s wedding Production shows that the company’s current ratio is 1.40. In order to report a higher current ratio than the actual value, the company’s chief financial officer omitted some items such the accrued salary payable and supplies for the period. Based on the short case, two discussions will be prepared. The first discussion concerns whether failure to make adjustment entries would lead to an improvement in the current ratio. The second analysis shows whether it is ethical for such omissions to be made, and the relevant accounting principle involved.

Question 1 The current ratio is used to measure the ability of the company to meet all the current obligations using the current assets, and without exhausting the available current assets. The current ratio is obtained using the following formula = (current assets/current liabilities). J’s Wedding Production required current ratio of 1.5 means that the company’s current assets should cover the current liabilities 1.5 times before they are exhausted. Similarly, the actual current ratio of the business, 1.

4 means that the current assets could cover the current liabilities 1.4 times before they are exhausted. The accrued salary payable and the supplies used during the year are categorized under liabilities and current assets respectively (Kapil, 2011). Their omission reduces the reported total current responsibility and also increases the stated amount of inventories (current assets) for the company. The total current liabilities are a factor of the current ratio. That is, current ratio = (current assets/current liabilities).

Therefore, if the current liabilities are reduced by eliminating some liability items (the accrued salary payable) and the current assets increased by included the amount of inventories used during the period, the numerator element is increased while the denominator part is reduced, thus, leading to high current ratio (Kapil, 2011). Question 2 Various users use the accounting information for different purposes. The user is the investors, the employees, lenders, suppliers and other trade creditors, the customers, the government and their agencies, and the public (Gibson, 2009).

For this reason, it is unethical for the CFO to skip certain adjusting entries in order to conform to the loan’s condition (Lee, 2006). In order to justify the preceding statement, the following accounting principles were violated by the company’s CFO: the materiality principle, the full disclosure principle and the accrual principle (Weygandt, Kimmel & Kieso, 2009). First, the materiality principle states that the accounting transactions should be recorded in the financial statements if the omission of which has a significant influence on the decision made by the users of such information.

Based on this principle, the omission of the accrued salary payable and supplies as is done by the CFO is to influence the lender to award loan to the company (Weygandt, Kimmel & Kieso, 2009). Second, the full disclosure principle states that the information that influences the users’ perception of a business’s financial performance must be included in or alongside the accounting information. Accrual salary payable and the supplies used are critical information that can influence the users’ perception of the company.

Their omission by the CFO violates the very basis of the principle. Third is the accrual principle, which states that the recording the accounting transactions during their period of occurrence is mandatory. The company’s CFO omitted the accrual salary payables and the supplies used during the period, which violates the very core of the principle (Weygandt, Kimmel & Kieso, 2009). ReferencesGibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: South-Western Cengage Learning.Kapil, S. (2011).

Financial management. Noida, India: Pearson.Lee, T. A. (2006). Financial reporting and corporate governance. Chichester [u.a.: John Wiley & Sons.Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Accounting principles. New York: Wiley.