Quiz 2: Cognitive Processes and Ethical Decision Making in Accounting


1. Accrual earnings are income that has been earned but not yet received in cash. For example, a contractor who completed a construction project but not paid yet. Cash earnings are income that has been earned and paid for. For example, a movie theater received cash for tickets sold. Capital expenditures are expenses incurred for use over an extended period. For example, this can be the purchase of a building. On an income statement, capital expenditures will not be listed in full but rather depreciated over time. A $1 million capital expense may be split over a 10 year period as $100,000. Operating expenditures are everyday expenses for things that shouldn't last long. These include recurring payments such as utility fees. In this case, company W wanted to list their "line cost", a recurring expense as capital expenditures. This would inflate the net income on their income statement. Operating cash flow is calculated from net income, so inflation of net income would inflate operating cash flows. 2. The stakeholders in the case are investors and the company. The company would like to remain profitable and receive additional investment, by manipulating their expense accounts to seem more profitable than they actually were. The investors need accurate report of company expenses, they are harmed by the fraud because they invested in a company that lied about its profitability. 3. The auditor in this case detected that her organization had an unethical management practice and sought external help. She pursued the misconduct further which potentially helped many investors back out of an unprofitable investment. The auditor for company E did enough internally but failed to obtain external help.

The stakeholders in this case are the government, and the parents. The government, national guards, airports, and police spent considerable effort to find a boy that turned out not to be missing. This effort could have been spent on actual events. The parents have a stake in the publicity of their stunt.

1. The Kohlberg's moral development stages are listed below. Preconventional: • Stage 1: Obedience and punishment - morals are followed to avoid punishment • Stage 2: Self-interest - morals are pursued if there's a benefit. Conventional: • Stage 3: Norms - one considers how others may perceive their actions. • Stage 4: Social order - morals need to be followed to maintain order in society Postconventional: • Stage 5: Social contract - considers the overall cost benefit to society. • Stage 6: Universal ethics - absolute notion of following ethics At the preconventional level, C may have an obligation to report to her store manager that her supervisor was taking home early. The store is paying additional wage for less work. It's also in C's best interest to have someone work late with her to serve customers or close up as late shifts can be dangerous. At the conventional level, C's supervisor may be disappointed in her. But by not reporting his behavior she's working neglecting her duty to her company and letting bad behavior slip. At the postconventional level, C needs to realize that it's unethical to take early leave and just report it. 2. C's supervisor has a drinking problem. It will not go away if he continues drinking. The company had not fired him but only demoted him. She should advise him to be upfront to the company with the problem. In the long run the supervisor is better off by working on his alcoholism. A really good friend would want to see him be a better person. 3. The store manager should approach both C and her supervisor. She needs to find out all the facts of the case from them, then determine the best course of action. C will need to be reprimanded for not reporting her supervisor, but given that she worked diligently she shouldn't be fired. The supervisor on the other hand is unreliable. But an ethical treatment would be to work with the supervisor to treat his alcoholism.