Horizon Corporation manufactures personal computers. The company began operation
ID: 2332559 • Letter: H
Question
Horizon Corporation manufactures personal computers. The company began operations in 2013 and reported profits for the year s 2013 through 2016. Due primarily to increased competition and price slashing in the industry, 2017's income statement reported a loss of $20 million. Just before the end of the 2018 fiscal year, a memo from the company's chief financial officer to Jim Fielding, the company controller, included the following comments: If we don't do something about the large amount of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss for 2018 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of inventory to J.B. Sales Inc., in Oklahoma City. I know the company's president and he will accept the merchandise and acknowledge the shipment as a purchase. We can record the sale in 2018 which will boost profits to an acceptable level. The J.B. Sales will simply return the merchandise in 2019 after the financial statements have been issued.
Required:
Discuss the ethical dilemma faced by Jim Fielding.
Explanation / Answer
This is highly an ethical issue, since there is a manipulation. The amount of sales which are suggested to be recorded is not actually happened but created. Both seller and purchaser know that this is created because of making the financial statements healthy, which is known as manipulation and should not be done for the sake of stakeholders’ interests.
Stakeholders are the users of financial statements like, shareholders, lenders, suppliers, bankers, etc. They are interested about company’s performances; they take decisions based on the financial statements, suppose a shareholder’s decision whether to keep shares or not. Therefore, true and fair statements must be provided by the company. This thing is not happening here – increasing sale increases net income, which may misguide the stakeholders because of not actually happening.
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