Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 16

In a speech titled: “A QT Report Card for High Quality Financial Reporting,” at the Critical Issues in Accounting Forum program sponsored by Wake Forest University, Lynn Turner, former Chief Accountant of the SEC, made the following analogy to describe representational faithfulness:

“A map’s representational faithfulness may be determined by how well the map describes the coastline. In the same way, a financial statement’s representational faithfulness may be evaluated by how well it represents the economic resources and obligations of the company, and by how well the transactions and events that change those resources and obligations are described.”

If a company purposefully understates an estimated allowance for sales returns to inflate revenue in the current year, how does this accounting influence the representational faithfulness and quality of financial information?

Step 1 of 2

Ethics:

Ethics in the accounting profession is defined as guidelines and principles. It includes laws and standards of behavior. 

Accounting:

In simple words, accounting is defined as a process to record, classifying, and analyzing the financial information of an organization. Accounting requires a specific knowledge because it is not a single process as it includes many sub-processes under it. 

Sales: 

Sales are defined as the number of goods and services sold by the organization during their accounting period.

Allowance for doubtful accounts: 

Allowance for doubtful accounts defines the accounts receivable amount would not be received from the customer, it anticipates the losses associated with bad debts. Allowance for doubtful accounts helps in the accuracy in the books of account. It decreases the amount of accounts receivable.