Instructions: Please read the ethics case study listed below. Consider the issues addressed using the chapter information and the Ethical Standards for CPAs found at the end of your textbook. Once you have come to a conclusion as to how the company should answer the questions pondered, please post them on the discussion board found in that chapter lessons section. Afterwards, you must answer two of your classmates postings as to whether you agree or not and why.

Problem

A5-54 Ethics involved with assigning cost to inventory

Mike is the production manager of a large manufacturing firm. He is worried about the prospect of bonuses for the upcoming year. The company has paid out bonuses for the past ten years, so Mike has been counting on the bonus to help pay some debts he has accumulated over the year. In addition, Mike and his wife are expecting their first baby in two months. Due to the unexpected downturn in sales, bonuses appear to be unlikely this year.

Joe is the accounting manager for the company. He and Mike are good friends. Over lunch one day, Mike confides in Joe about his financial difficulties. He is stressed out over the bills and the baby on the way. He really needs that bonus.

Joe wants to help Mike. Joe has been with the company for many years and knows that fundamentally the company is strong. This year is just an unusual year. He thinks about ways that he can help Mike. Mike is a good employee and the company does not want to lose him if he were to go to work for a competitor.

Joe thinks about how he can best help Mike. He thinks about a few different options, including the following:

Option #1: Joe could increase income for the year by adding sales commission cost and advertising cost to the products. If he does this, the product cost will be higher. However, there is still a large inventory of units on hand. The units that are still in ending inventory will shield these cost from decreasing net income until the units are sold in a future year.

Option #2 Joe could quietly make Mike a loan from the company to help him get bank on his feet. The company does not have a policy prohibiting loans to employees, but neither does it have a policy of allowing such loans to employees.

Joe does not know what to do.

Requirements

Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions: A. If Joe were to increase income by adding sales commission cost and advertising cost to product cost as described in Option #1, what ethical principles would be violated? B. If Joe were to make a company loan to Mike (Option #2), what, if any ethical principles would be violated? C. What do you think Joe should do in this situation?