Reference no: EM131803123

Topic: Ethical issues in business and accounting: Accrual accounting makes it possible to shift income between accounting periods. Sometimes sales on account that happened in the first week of January are recorded and shown in the last week of December instead. Conversely, sometimes bills for December expenses aren't received until January and are recorded in January. The effect is that the prior year's reported net income is higher than it should be.

Sometimes the opposite occurs. Companies prefer to accelerate the timeframe in which they report expenses or try to defer sales that happened in December and report them in January. The effect of misreporting these transactions lowers net income for the year.

Reporting revenues or expenses in the wrong period occurs frequently. Often it is the result of honest mistakes (for example, when supplies are purchased and received in December, but the bill from Staples doesn't arrive until January, the accounting clerk inputting the bill may fail to check the date and input the expense in the month the bill was received). In other cases, however, it is an intentional attempt to manipulate the financial statements.

Discussion points: Under what circumstances would a company (or a manager) want to report higher sales or net income? Under what circumstances would a company want to report lower sales or net income than it actually had? Is it ever ok to manipulate earnings in the ways described above or in other ways? Are there legitimate (honest, legal and ethical) ways to shift income between years or accounting periods?