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Ethical Case Study
Morgan Johnson is in a tough situation. The president of her company wants her to date all the sales invoices in the first half of May as if they occurred in the month of April. It's a hard thing to say refuse since the request is coming from such a high figure of authority as the president of the company. What she should do depends on the person she is; if she is one of strong moral character she should refuse at the expense of the possibility losing her job. On the other hand, if she wanted the inflated bonus she could manipulate the financial statements for the benefit of the company. The problem with this is she will be breaking some of the guidelines issued by the Financial Accounting Standards Board (FASB) and may face prosecution or maybe even jail time.
If she did decide to what the president is asking of her it will affect the financial statements greatly. The balance sheet will be affected in a number of ways. First of all, the assets accounts receivable or the cash, depending on how the company takes in their revenue, will be increased. The inventory will obviously decrease as the goods were sold to the customers. The retained earnings portion of the balance sheet would increase in value as the company revenues increased.
Another financial statement affected by Morgan's decision would be the income statement. The income statement would have an inflated amount of money at the year-end then it would have previously. This will make the company appear as if they have more money than the really do. The increased revenues inflated the income statement; which in turn affects the overall net income.
One statement that might not be affected by Morgan's decision is the statement of cash flows. This depends on whether or not the company received cash for their goods sold. The customers may have purchased the goods on credit and therefore the statement of cash flows would remain unchanged. If the buyers purchased the goods with cash then the statement of cash flows would be over inflated along with the balance sheet and the income statement.
Another aspect that is worth taking a look at is how the financial statements will be affected for the month of May. The totals for May will obviously be lower than they usually are, but the month is one of big business for the company and it might be obvious that someone manipulated the numbers. That is up to the person to decide whether or not they want to take the risk of getting caught.
This practice will solve the problems with the banks in a few ways. The banks will see that the company is financially sound if they met their working capital ratio of 11. The working capital ratio is a measure of the ability the company has to pay its short-term obligations. Another ratio that might be of some importance is the inventory turn over ratio. This ratio would give the banks a better idea of how much business Green-Grow is actually doing. This ratio would be greatly inflated if they recorded the entire inventory that turned over in the first half of May on the balance sheets of the month of April. Doctoring the financial statements would give false information to the banks, but I believe that it would be effective in solving the company's problems with the bank
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