Ethics in Business
Assume you work as a staff accountant in the ABC Plumbing Supply Company (a public corporation
chartered in the State of Georgia) that manufactures and sells plumbing-related components to
building contractors. To encourage the company to earn as much profit on each individual sale as
possible, the company manager's pay is based, in part, on the company's gross profit percentage. To
encourage control over the company's operating expenses, the manager's pay also is based on the
company's net income.
You are currently preparing the company's financial statements. The company had an excellent
year, with initial (gross) sales revenue of $100,000, cost of goods sold of $50,000, sales returns and
allowances of $6,000, sales discounts of $4,000, and salaries and wages expenses of $30,000.
(Assume the company does not report income taxes.) The company's manager stresses that "it
would be in your personal interest" to classify sales returns and allowances and sales discounts as
selling expenses rather than subtract them directly from sales revenue on the company's income
statement. He justifies this "friendly advice" by saying that he's not asking you to fake the numbers.
He just believes that those items are more accurately reported as expenses. Plus, he claims, you
don't have to follow Generally Accepted Accounting Procedures (GAAP).
Required:
1. Prepare an income statement for the company in good form. Using this income statement,
calculate the division's gross profit percentage.
2. Prepare an income statement for the company using the classifications advised by the manager.
3. Using this income statement, calculate the company's gross profit percentage.
4. What reason (other than reporting "more accurately") might be motivating the manager's advice
to you?
5. Do you agree with the manager's statement that "he's not asking you to fake the numbers"?
6. Do you agree with the manager's statement about not having to follow GAAP?
7. How should you respond to the company manager's "friendly advice"?