Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.
1-(a) What are generally accepted accounting principles (GAAP)? (b)What bodies provide authoritative support for GAAP? 2. What elements comprise the FASB’s conceptual framework?
1) Generally accepted accounting principles (GAAP) are a set of standards and rules, having substantial authoritative support, that are recognized as a general guide for financial reporting.
2) The bodies that provide authoritative support for GAAP are the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).
BYP8-6 You are the assistant controller in charge of general ledger accounting at Riverside Bottling Company.Your company has a large loan from an insurance company.The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30 the cash balance is $80,000, which you report to Gena Schmitt, the financial vice president. Gena excitedly instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Gena says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement.They could close us down, put us all out of our jobs!” Gena continues, “I talked to Oconto Distributors (one of Riverside’s largest customers) this morning.They said they sent us a check for $150,000 yesterday.We should receive it tomorrow.If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”
(a) Who will suffer negative effects if you do not comply with Gena Schmitt’s instructions? Who
will suffer if you do comply?
(b) What are the ethical considerations in this case?
(c) What alternatives do you have?
(a) You, as assistant controller, may suffer some negative effects from Gena Schmitt, the financial vice-president, if you don’t follow her instructions. Maybe the insurance company will react the way Gena suggests, but probably not.
If you comply and falsify the June 30 cash balance by holding the cash receipts book open for one day, you will suffer personally by sacrificing your integrity. If you are found out, you could be prosecuted for preparing a fraudulent report. The insurance company, as the lender and creditor, is deceived.
(b) Holding the cash receipts book open in order to overstate the cash balance is a fraudulent, deceitful, unethical action. The financial vice-president should not encourage such behavior and a controller should not follow such instructions.
(c) (1) You can follow the vice-president’s instructions and misstate the cash balance—wrong! (2) You can advise the vice-president against holding the books open, prepare an accurate report, and have the vice-president or the president discuss the situation with the insurance company. It can be explained that the low cash balance was only temporary. Honesty is still the best policy.