Question

EYK12-7. Accounting Ethics Case Due to an economic recession. Anton Corporation faces severe cash flow problems. Management forecasts that payments to some suppliers will have to be delayed for several months. Jay Newton, controller, has asked his staff for suggestions on selecting the suppliers for which payments will be delayed.

"That's a fairly easy decision." observes Tim Haslem. "Some suppliers charge interest if our payment is late, but others do not. We should pay those suppliers that charge interest and delay payments to the ones that do not charge interest. If we do this, the savings in interest charges will be quite substantial."

"I disagree," states Tara Wirth. "That position is too 'bottom line' oriented. It's not fair to delay payments only to suppliers who don't charge interest for late payments. Most suppliers in that category are ones we have dealt with for years; selecting these suppliers would be taking advantage of the excellent relationships we have developed over the years.The fair thing to do is to make pro-rata payments to each supplier."

"Well, making pro-rata payments to each supplier means that all our suppliers will be upset because no one receives full payments," comments Sue Myling. "I believe it is most important to maintain good relations with our long-term suppliers; we should pay them currently and delay payments to our newer suppliers. The interest costs we end up paying these newer suppliers are the price we must pay to keep our long-term relationships solid."

Required

Which suppliers should Jay Newton select for delayed payments? Discuss.

Answer 1

SINCE THE COMPANY FACES SEVERE ECONOMIC RECESSION DUE TO WHICH THE COMPANY IS NOT IN A POSITION TO PAY TO ALL OF ITS SUPPLIERS. COMPANY HAS TO CHOOSE THE SUPPLIERS WHOSE PAYMENTS CAN BE DELAYED.

THERE ARE THREE SOLUTIONS PROVIDED BY DIFFERENT STAFF MEMBERS. IN TERMS OF BUSINESS ETHICS THE SOLUTION PROVIDED BY TARA WIRTH OF PAYING PRO-RATA TO EACH SUPPLIER IS CORRECT.

AS THE COMPANY CAN’T PAY ALL ITS SUPPLIERS AT ONCE, THEY SHOULD PAY SOME PART OF THEIR DUES. THIS WILL GIVE SUPPLIERS THE ASSURANCE THAT AT LEAST COMPANY IS NOT DEFAULTING ALL OF THEIR MONEY.

THE COMPANY CAN WORK OUT THE PRO-RATA PAYMENT BY CONSIDERING THE AMOUNT OF CASH IT CAN DISTRIBUTE TO THE SUPPLIERS AND DIVIDE IT BY THE TOTAL AMOUNT DUE TO THEIR SUPPLIERS AND MULTIPLY IT BY 100.

THE PERCENTAGE COMPANY GETS, SAY 40% IS THE AMOUNT COMPANY HAS TO PAY TO EACH OF ITS SUPPLIERS. THIS WILL NOT DESTROY THE IMAGE THE IMAGE OF THE COMPANY AS IT SEEMS IN OTHER OPTIONS. ALTHOUGH THE SUPPLIERS WOULD BE HAPPY AS CLAIMED BY SUE MYLING BUT AT LEAST COMPANY CAN SAID TO BE ETHICAL IN ITS DEALINGS.