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Accounting III/ Assignment Issue - Essay Example

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Generally Accepted Accounting Principles (GAAP) have been defined variously as “Authoritative rules, practices, and conventions meant to provide both broad guidelines and detailed procedures for preparing financial statements and handling specific accounting situations”(…
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Accounting III/ Assignment Issue Gp Capt NA Moitra VM Administrator, Academia-Research.com 01-22 03:46 Generally Accepted Accounting Principles: Generally Accepted Accounting Principles (GAAP) have been defined variously as “Authoritative rules, practices, and conventions meant to provide both broad guidelines and detailed procedures for preparing financial statements and handling specific accounting situations”( www.businessdictionary.com) and “A combination of authoritative standards set by policy boards and simply the commonly accepted ways of recording and reporting accounting information”(www.investopedia.com).
Accountants use GAAP to “guide them in recording and reporting financial information, as GAAP comprises a broad set of principles that have been developed by the accounting profession and the Securities and Exchange Commission”(www.cliffsnotes.com). Epstein, Nach and Bragg (2008) go to great lengths to clarify the principles GAAP stands for and “suggest procedures that could serve as a general model for approaching research on accounting issues, including authoritative literature (ibid, pp 20-21).
A total of twelve principles are accepted as universally applicable, and are explained in detail in CliffsNotes’ article (www.cliffsnotes.com). These twelve principles are Economic entity assumption; Monetary unit assumption; Full disclosure principle; Time period assumption; Accrual basis accounting; Revenue recognition principle; Matching principle; Cost principle; Going concern principle; Relevance, reliability, and consistency; Principle of conservatism and Materiality principle. In an article of Jun 17, 2009 titled: ‘Acceptable Practices Throughout the Accounting Cycle’, Miller breaks up the twelve into three sub-groups of four, with Economic entity, Monetary unit, Time period and Going concern termed ‘Assumptions’; Cost, Full disclosure, Revenue recognition and Matching called ‘Principles’ and the remaining termed ‘Constraints’(gaap-standard-accounting-practices.suite101.com).
Cutting across these groupings, Miller believes that GAAP assists in ensuring that financial statements are: Relevant, Reliable, Consistent and Comparable (ibid). These four terms are best explained by Bradford in her article on the same site, dated Aug 6, 2007 (gaap-standard-accounting-practices.suite101.com).
Consistency means that all information should be gathered and presented in the same manner across all periods (ibid).
Relevance means that information in a firm’s financial and other public statements is appropriate and can help an individual to assess the company’s fiscal future (ibid).
Reliability means that a company’s financial statements are accurate and can be attested to by a third party (ibid).
Comparability is one of the most important GAAP categories. This way, a company’s financial statements/documentation can be compared to those of similar businesses. This factor is of great interest to the investing public (ibid).
Closer examination reveals that three factors apply directly to the case under review, which are lack of Consistency, Reliability and Comparability, though not intentional. However, this situation does not speak highly of Mr. Hayes’ and Mr. York’s competence.
Manufacturing costs include job order and process costs. The former totals costs for each job whereas the latter is “the cost assigned to a business process based on the cost of the activities that compose the process” (www.answers.com). There are other sundry costs also to be added, like design, patents, advertising, distribution and customer service costs. Using manufacturing costs only as the basis of their bid has a simple but incorrect connotation. It brings down the bid significantly, even if inadvertently. In this case, design, distribution and customer service costs were omitted, as was the profit margin. Its bid would thus have been way below average/expectations. CompWest.com would have signed the contract at the earliest, had it reached them. Farley could have lost a huge sum. Luckily, the Contract Documents are still with the controller, as given in the setting. This, and the fact that Farley’s President is unaware of developments indicates that the bid has not been sent to CompWest.com. After all, millions of dollars are at stake, and the President of the company will definitely be actively involved.
The parties involved in Farley’s ethical dilemma are three: Tony Hayes, the cost accountant who failed to follow company policy as clearly stipulated by Byron Wilson, Farley’s President, apart from making a silly blunder by forgetting the basics of his job; Paul York, the controller who failed to oversee Mr. Hayes’ job and missed out the opportunity to step in and rectify the omission and finally, Farley itself.
Mr. York’s alternatives are to keep quiet, or to inform the higher authorities. As a responsible senior person, he must:
1. Get all available information from Mr. Hayes, including a written explanation.
2. While Mr. Hayes is collecting all information, inform Mr. Byron Wilson.
If he informs Mr. Wilson, he puts both Mr. Hayes’ and his own job at risk. This is the singular ethical problem in the balance. Should he or should he not inform the higher authorities? Hayes might be a friend, apart from being a co-worker. It is felt that he must inform them.
Effects on the Concerned Parties:
Tony Hayes: Probable dismissal on two grounds, incompetence and failure to follow instructions, posing a grave financial threat to Farley.
Paul York: Stern warning.
Farley: In all probability, nothing as the bid has not been sent, other than a shake up and stiff talking-to by the President.
Further Actions by Paul York:
Paul York should initiate re-evaluation of actual costs and set up of a fool-proof method to preclude recurrence of such an event.
Review his Program Evaluation and Review Technique (PERT) chart and add additional checks as necessary. If he does not have one, make a PERT chart for himself.
As Sam Antar, former CFO of Crazy Eddie says, “My advice to the accounting profession is: Do not trust, just verify. Verify, verify, and verify”(whitecollarfraud.blogspot.com).
References Cited
Epstein, Barry J., Nach, Ralph., Bragg, Steven M., Wiley GAAP 2008: Interpretation and
Application of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES; John Wiley &
Sons, Inc., ISBN 978-0470-13513-6, accessed on 01 February, 2010
Antar,S., as reported in http://whitecollarfraud.blogspot.com/2009/02/overstockcom-refuses-to-
correct-gaap.html; accessed on 21 January 2010.
Bradford, Tiffany., GAAP and Accounting Standards, An Explanation of Generally Accepted
Accounting Principles (GAAP), http://gaap-standard-accounting-practices.suite101.com/
article.cfm/what_is_gaap, accessed on 02 February 2010.
Miller, Miranda., Quick Reference GAAP Guide: Acceptable Practices Throughout the
Accounting Cycle, as reported in http://gaap-standard-accounting-practices.suite101.com/
article.cfm/ quick_reference _gaap_guide; accessed on 02 February 2010.
http://www.cliffsnotes.com/study_guide/Generally-Accepted-Accounting-Principles.topic
ArticleId-21081,articleId-21005.html, accessed on 02 February, 2010
http://www.answers.com/topic/process-cost, accessed on 21 January 2010.
http://www.businessdictionary.com/definition/generally-accepted-accounting-principles-
GAAP.html; accessed on 21 January 2010.
http://www.investopedia.com/terms/g/gaap.asp; accessed on 21 January 2010. Read More
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