Please respond to the following discussion question. Your response should fully address all elements of the question and be a minimum of 200 to 300 words long. Chapter 1 discusses ethics in business and accounting. The notes to the financial statements describe the accounting principles used by a company to record its transactions. Accountants apply the convention of conservatism when analyzing economic events and recording them. The following is a definition of conservatism: In the application of accounting principles and the development of estimates, accountants should be conservative. Given choices between various methods of recording economic events, accountants should apply principles that result in revenues being stated at lower amounts versus higher amounts and expenses being stated at higher amounts rather than lower amounts. In general, accountants should apply accounting principles that would tend to understate revenues, net income and assets versus overstating them. What are some of the ethical issues of selecting accounting principles for a company? Do you believe accountants have been properly conservative in the past few years with financial statement presentation? Why? As a potential investor, what risks do you want to identify with financial statement analysis?

QUESTION 2 DISCUSSION

Accountants often face ethical dilemmas during presentation, reporting, preparation, and disclosure of financial information. These ethical issues could be fraudulent financial reporting where the company management misstates the financial statements with the intent of discouraging and misleading investors or maintain the company’s shares (Henderson, Peirson, Herbohn, & Howieson, 2015). Misappropriation of a company’s assists is another ethical dilemma that can happen at any level where an individual uses the company’s finances for other purposes other than the company’s interests. Payroll confidentiality can easily be breached by greedy accountants who might affect the clients negatively. Some customers might request for financial statements manipulation which goes against the company rules and regulations. Yes, I believe accountants have been conservative in the past few years with financial statement presentation because of the introduction of the Sarbanes-Oxley Act of 2002. This law has harsh penalties for accountants who violate accounting ethics. This legislation allows harsh punishments for financial records manipulators, information destruction and misappropriation of companies funds and assets. The chief executives involved in companies economic and ethical violations will be held responsible for their actions. This law was not present before, and accountants were often not conservative and interfered with financial records. Today, this law has changed this behavior because of the harsh penalties and consequences taking for any violators regardless of their status.

Financial statement analysis helps investors to measure a company’s profitability, cash flow, liquidity, and company-wide efficiency. There is a risk that comes with financial statements that have been biased or misquoted. Wrong financial analyses mislead investors and give the wrong company’s value presentation. An investor should use a combination of different types of financial statements to evaluate a given company. Balance sheets, for instance, provide a snapshot of a company’s assets, shareholders and liabilities for a given period (Henderson, Peirson, Herbohn, & Howieson, 2015). Income statements provide analysts with gross profit, net profit, and operating profit information. Cash flow statements give an overview of a company’s operating activities, financial activities, and investing activities.

References

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.