Question

ION bownloadable eTextboolk ent CALCULATOR : FULL SCREEN | | PRINTER VERSION | | nACK NE Expand Your Critical Thinking 4-8 (Essay) Wells Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of wells' chemical pesticides. During the coming year, Wells will have environmentally safe and competitive replacement chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed those of any prior year. Therefore, the dedine in this year's sales and profits appears to be a one-year aberration. Even so, the company president believes that a large dip in the current year's prolits could cause a significant drop in the market price of Wells' stock and make it a takeover target. To avoid this possibility, he urges Tim Allen, controller, to accrue every possible revenue and to defer as many expenses as possible in making this period's year end adjusting entries. The president says to Tim, "We need the revenues this year, and next year we can easily absorb expenses deferred from this year. We can't let our stock price be hammered down! Tim didn't get around to recording the adjusting entries until January 17, but he dated the entries December 31 aa if they were recorded then. Tn also made every effort to comply with the president's request. Who are the stakeholders in this situation? LINK TO TEXT What are the ethical considerations of the president's request and Tim's dating the adjusting entries December 317 earch

Answer 1

1. The stakeholders in the situation are the existing and potential stockholders of the company, the creditors and lenders to the company and any other entity which uses the financial statements as the base for making economic decisions pertaining to the company.

2. The generally accepted accounting principles do not allow for recognizing revenues till there is virtual certainty of realizing the revenues, or for deferring revenue expenses. As per the matching principle, the expenses pertaining to a period should be matched against the revenues earned during the period.

As there will be no potential revenues from sale of the banned pesticides, recognizing fictitious revenues in the current period, and deferring the recognition of current year expenses to the next accounting period would amount to perpetrating fraud on the stakeholders of the company. Deferring actual expenses of the period to a future accounting period violates the matching principle.

3. No.