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Conservatism in accounting; ethical issues of principles

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What does conservatism mean in accounting? What are some of the ethical issues of selecting accounting principles for a company? Accountants apply the convention of conservatism when analyzing economic events and recording them. Do you believe accountants have been properly conservative in the past few years with financial statement presentation? Why?

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What does conservatism mean in accounting?

An old definition in accounting defines conservatism by the adage "anticipate no profit, but anticipate all losses" (Bliss 1924). This concept results in an asymmetrical treatment of revenue and expense, but the effect is to represent the results of financial operations in the most conservative view. The concept is important for those who rely on independently prepared financial statements including shareholders, potential investors, lenders, taxing authorities, regulatory agencies and others.

Because the income statement seems to be the most important part of the financial statements for the groups listed above, conservatism will tend to only report revenue when it is deemed collectible and verifiable whereas expenses and losses may be reported only when probably. One could say that that standards applied to recognition of revenue are more ...

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Accounting and Ethical Issues

Need help in evaluating the attached Case. Please give complete and through answers as to why they are good ethical resolutions; or why they are not.
CASE 7.2
"Improving" the Balance

Affections manufactures candy and sells only to retailers. It is not a publicly owned company and its financial statements are not audited. But the company frequently must borrow money. Its creditors insist that the company provide them with unaudited financial statements at the end of each quarter.

In October, management met to discuss the fiscal year ending next December 31. Due to a sluggish economy, Affections was having difficulty collecting its accounts receivable, and its cash position was unusually low. Management knew that if the December 31 balance sheet did not look good, the company would have difficulty borrowing the money it would need to boost production for Valentine's Day.

Thus the purpose of the meeting was to explore ways in which Affections might improve its December 31 balance sheet. Some of the ideas discussed are as follows:

1. Offer customers purchasing Christmas candy a 10% discount if they make payment within 30 days.

2. Allow a 30-day grace period on all accounts receivable overdue at the end of the year. As these accounts will no longer be overdue, the company will not need an allowance for overdue accounts.

3. For purposes of balance sheet presentation, combine all forms of cash, including cash
equivalents, compensating balances, and unused lines of credit.

4. Require officers who have borrowed money from the company to repay the amounts owed at December 31. This would convert into cash the "notes receivable from officers," which now appear in the balance sheet as noncurrent assets. The loans could be renewed immediately after year-end.

5. Present investments in marketable securities at their market value, rather than at cost.

6. Treat inventory as a financial asset and show it at current sales value. As Affections is not a publicly owned company, it is not legally required to prepare its financial statements in conformity with generally accepted accounting principles.

7. On December 31, draw a large check against one of the company's bank accounts and deposit it in another of the company's accounts in a different bank. The check won't clear the first bank until after year-end. This will substantially increase the amount of cash in bank accounts at year-end.

a. Separately evaluate each of these proposals. Consider ethical issues as well as accounting issues.
b. Do you consider it ethical for management to hold this meeting in the first place? That is, should management plan in advance how to improve financial statements that will be distributed to creditors and investors?

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