Activity $60$ Ethics Affecting Financial Statement Amounts

Purpose:

Understand the effect ethical decisions have on amounts reported for accounts receivable.

A manager of a small electronics store would like to expand and also sell computers. The expansion would require seeking a loan from a local bank. The manager knows net income for this year is lower than what is needed to qualify for additional financing at his current bank. The manager also realizes some of the estimates used to calculate net income could be adjusted to make net income come within the qualifying range for an additional loan.

Q$1$ On the income statement, overestimating bad debt expense will result in $($understating $/$ having no affect on $/$ overstating$)$ operating expenses and $($understating $/$ having no affect on $/$ overstating$)$ net income.

Q$2$ On the balance sheet, overestimating bad debt expense will result in $($understating $/$ having no affect on $/$ overstating$)$ the allowance for bad debts and $($understating $/$ having no affect on $/$ overstating$)$ accounts receivable, net.

Q$3$ To qualify for the bank loan, the manager should $($over $/$ under$)$ estimate bad debt expense. Why?

Q$4$ Is intentionally misstating an estimate ethical? $($Yes $/$ No $/$ Maybe$)$ Why?

Q$5$ Is intentionally misstating an estimate legal? $($Yes $/$ No $/$ Maybe$)$ Why?

Q$6$ List some possible consequences if bank officials detect the misstatement of the estimaActivity $60$ Ethics Affecting Financial Statement Amounts

Purpose:

Understand the effect ethical decisions have on amounts reported for accounts receivable.

A manager of a small electronics store would like to expand and also sell computers. The expansion would require seeking a loan from a local bank. The manager knows net income for this year is lower than what is needed to qualify for additional financing at his current bank. The manager also realizes some of the estimates used to calculate net income could be adjusted to make net income come within the qualifying range for an additional loan.

Q$1$ On the income statement, overestimating bad debt expense will result in $($understating $/$ having no affect on $/$ overstating$)$ operating expenses and $($understating $/$ having no affect on $/$ overstating$)$ net income.

Q$2$ On the balance sheet, overestimating bad debt expense will result in $($understating $/$ having no affect on $/$ overstating$)$ the allowance for bad debts and $($understating $/$ having no affect on $/$ overstating$)$ accounts receivable, net.

Q$3$ To qualify for the bank loan, the manager should $($over $/$ under$)$ estimate bad debt expense. Why?

Q$4$ Is intentionally misstating an estimate ethical? $($Yes $/$ No $/$ Maybe$)$ Why?

Q$5$ Is intentionally misstating an estimate legal? $($Yes $/$ No $/$ Maybe$)$ Why?

Q$6$ List some possible consequences if bank officials detect the misstatement of the estimate.

Q$7$ Discuss some ways the misstatement of bad debt expense could be detected by bank officials.

Q$8$ In general, unethical decisions make the $($short term $/$ long term$)$ appear better, but may result in huge $($short$-$term $/$ long$-$term$)$ costs