Read the BYP16-7 Ethics Case located at the end of chapter 16 in the Broadening

Question

Read the BYP16-7 Ethics Case located at the end of chapter 16 in the Broadening Your Perspective section of your textbook (eTex) and Answer the three questions posed. Ethies Case Financial Services Company holds a large portfolio of debt and stock securities as an investment. The total fair value of the portfolio at December 31, 2017, is greater than total cost. Some securities have increased in value and others have decreased securities in the portfolio. Bales suggests classifying the securities that have increased in value as trading securities in order. to year. She wants to classify the securities that have decreased in value as long-term available-for-sale securities, so that the increase net income for the decreases in value will not affect 2017 net income. Reeble disagrees. She recommends classifying the securities that have decreased in value as trading securities and those that have increased in value as long-term arvailable-for-sale securities. Reeble argues that the company is having a good earnings year and that recognizing the losses now will help to smooth income for this year. Moreover, for future years, when the company may not be as profitable, the company will have built-in gains Instructions 1) Will classifying the securities as Bales and Reeble suggest actuallx affect earnings as each says it will? 2) Is there anything unethical in what Bales and Reeble propose? Who are the stakeholders affected by their proposals? 3) Assume that Bales and Reeble properly classify the portfolio. At year-end, Bales proposes to sell the securities that will increase 2017 net income, and that Reeble proposes to sell the securities that will decrease 2017 net income. Is this unethical?

Explanation / Answer

1) If you classify the securities as Bales and Reeble suggest, it will have an impact on net income. If the securities which have increased in value are classified as trading securites, the gain on the securities would flow to the income statement in the current year. If the securities which have decreased in value are classified as long term available for sale securities, it will postpone the recognition of losses.

2) The classification of securities is not in accordance with GAAP. Tus, the proposal made by Bales and Reeble is unethical. The stakeholders affected by this will be the employees, directors, auditors and prospective investors.

3) Selling securities of their own choice is not unethical financial behavior as long as provisions of GAAP are complied with. However, purposefully misrepresenting the financial statements through designed actions would be considered unethical.

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