Question

CASE 2.5 Ethics and Window Dressing LO2-49 The date is November 1S. current year. You are the chief executive officer of Omega Software-a publicly owned company that is currently in financial difficulty. Omega needs new large bank loans if it is to survive. Page 86 You have been negotiating with several banks. but each has asked to see your current year financial statements. which will be dated December 31. These statements will. of course. be audited. You are now meeting with other corporate officers to dizcuss the situation, and the following suggestions have been made. 1. "We are planning to buy WordMaster Software Co. for $S million cash in December. The owners of WordMaster are in no hurry. if we delay this acquisition until January, we'll have $S million more cash at year-end. That should make us look a lot more solvent." 2. "At year-end, we'll owe accounts payable of about $1S million. If we were to show this liability in our balance sheet at half that amount-say. $9 million-no one would know the difference. We could report the other S9 million ats stockholder:' equity and our financial position would appear much stronger" 3. "We owe Delta Programming $5 million., due in 90 days. I know some people at Delta. If we were to sign a note and pay them 10 percent interest, they'd let us postpone this debt for a year or more." 4. "We own land that cost us $2 million but today is worth at least S6 million Let's thow it at S6 million in our balance sheet, and that will increase our total assets and our stockholders' equity by S4 million." Instructions Separately evaluate each of these four proposals to improve Omega Software's financial statements. Your evaluations should consider ethical and legal issues as well as accounting itcues.

Answer 1

Wordmaster software Co. denoted as WS co.

Omega Software denoted as O software

1)

Liquidity position always drives with two-factor one is current assets and another one is a current liability. Cash is an important item in the balance sheet to improve the financial position and the company always wondering to improve the financial statement to attract prospective investors or bankers to avail loans. In the given case, O software planning to buy WS co. in $8 million in cash in December but at the same time, they delay the payment of acquisition by mutual understanding with WS co. and this will improve the liquidity health of the company and sounds more liquid.

If O software will disclose the acquisition of WS co. in the notes to the accounts of the financial statement to the stakeholders, then there no ethical and legal repercussions of the act.

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2)

Each item in the financial statement act as a financial tool to evaluate companies' financial status. Manipulating or omitting any item would be unethical and illegal. This action will attract direct violation of federal securities laws and persons in charge will be facing criminal charges or penalties.

In the given case, deliberate omission of liabilities or understated or overstated other items to improve financial indicators will definitely be caught by the auditor or the federal agencies.

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3)

There is nothing unethical or illegal by converting short-term loans into long-term by paying more interest on them. Companies often build strategies to improve the companies financial position by doing some adjustments by disclosing the facts in the note to the accounts.

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4)

The intentional violation of GAAP in the hope of misleading the stakeholders of the financial statement is unethical and illegal. Normally the company follows accounting principles in conformity with GAAP and discloses in a financial statement every year. In the given case, the company records assets at its historical cost but they will be planning to show at market value for window dressing of the financial position.