Question

Chris P. Bacon is the chief accountant for CV Industries, a large manufacturing company. In addition to its normal business activities, the company has excess warehouse space that it rents out to local businesses. Because the typical renter is a small business, CV Industries requires renters to make lease payments for the entire rental period on the day the lease is signed. As a result, CV Industries typically reports a large unearned rent balance on its balance sheet.

After making adjusting entries for the current year, Chris prepares the adjusted trial balance and notices that the company's earnings will decline significantly. He presents the adjusted trial balance to the company's CFO, Antonio Beldin, who is concerned about the earnings decline. Mr. Beldin notices the large unearned rent balance and proposes making an additional end-of-period adjusting entry to recognize the entire unearned rent balance as revenue in the current period. Chris protests, reminding Mr. Beldin that the adjusting entry for unearned rent has already been made. Mr. Beldin assures Chris that his proposal is acceptable, reminding Chris that “because we have already received the cash, we have the right to recognize the revenue in the current period.” He instructs Chris to make the additional adjusting journal entry. Chris is hesitant to follow these instructions, but he is sensitive to the company's emphasis on earnings growth and makes the adjusting entry as instructed.

Is Chris behaving ethically? Please let us know why or why not? Who is affected by Chris's decision?

Answer 1

Is Chris behaving ethically? Why?In the given instance Chris is not behaving ethically as he is violating the professional code of conduct that is to be followed by accountants i.e. he is not making an independent decision. His integrity and independence are influenced by the CFO. The decision to recognize unearned revenue as current revenue just because the cash is received is against Generally Accepted Accounting Policies as well as the Accounting and Financial Reporting Standards. Chris should not have accepted the decision to include unearned revenue in the statements. Just because he is focused on company's emphasis on earnings growth, does not mean he can change reporting to suit his needs.Who is affected by Chris’s decision?The company's stakeholders such as shareholders, lenders, vendors and creditors as they rely on financial statements to ascertain financial health of the company and take decisions.The CFO as his pay might be influenced by the company's financial performance in the prior financial year

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