Introduction and Purpose of Assignment
The inherent risk in accepting credit as payment for goods or services is the inability to collect some accounts. In an attempt to recognize income that will actually be collected, a certain percentage of accounts are deemed uncollectible. This discussion will help you determine how bad debt expense can affect income and the ethical ramifications of manipulating it.
Upon completion of this assignment you will be able to address the ramifications of incorrectly determining bad debt expense or manipulating it to meet goals. (2.5)
Theory and Context
The determination of bad debt expense involves best practices for estimating uncollectible accounts but the process can be subjective. This gives companies the opportunity to manipulate bad debt to their advantage by either decreasing income and deferring profits to future periods or increasing profits for the current period.
- Review the concept of uncollectible accounts.
- Read the Ethical Dilemma:
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the division’s income achieves a specific target. For 2016 the target will be achieved by a wide margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the head of the division’s management team, to try to reduce this year’s income and “bank” some of the profits for future years. Mary Beth suggests that the division’s bad debt expense as a percentage of net credit sales for 2016 be increased from 3% to 5%. She believes that 3% is the more accurate estimate but knows that both the corporation’s internal auditors as well as the external auditors allow some flexibility when estimates are involved. Does Mary Beth’s proposal present an ethical dilemma?
- How will recognizing higher bad debt expense increase profits in future periods?
- Taking into consideration ethical and biblical principles should the company follow Mary Beth’s proposal? Why or why not?
Must be in APA format with 200-300 words with one reference