ACME Company sells computer components and plans on borrowing some money to expand.
After reading a lot about earnings management, Bill, the owner of ACME, has decided he should try to accelerate some sales to improve his financial statement ratios.
He has called his best customers and asked them to make their usual January purchases by December 31.
Bill told the customers he would allow them, until the end of February, to pay for the purchases, just as if they had made their purchases in January.
What do you think are the ethical implications of Bill’s actions?
Bill is basically increasing his sales for the month of December so the bank can see his business is doing well. Bill wants to expand but the income he hoped by years end doesn’t show up that would qualify him to get the loan under normal circumstances, so he is asking for his customers to purchase items to show is current assets and liabilities prior to December 31. “Current ratios are the ratios that capture current assets and current liabilities at a moment in time—the end of the last day of the fiscal year. It also looks like he is boosting his earning for the beginning of the fiscal year.(Reimers, 2012)
ACME wants to use their current ratio prior to December 31; however, if creditors look at historical data to analyze the company’s earnings and it shows that during the last day of the fiscal year and the beginning of the next their earnings don’t coincide with previous years, the creditors could assume, depending on how much of a loan he is asking for, he is adjusting his books. Also if he borrow more money than his business is qualified for, in the long run he will not be able to cover the debt. It’s unethical for ACME to do this even though companies have done it in the past.
Reimers, J Financial Accounting: A Business Process Approach Powered By