A new CEO has come in from the outside to turn struggling Doak Industries into a

Question

A new CEO has come in from the outside to turn struggling Doak Industries into a profitable organization. Relying on market research, she wanted to focus production on the two specific product lines produced by the papers division.

Market research proved correct, and, by the end of the year, the papers division had exceeded budgeted profits by 18 percent. The controller, Ray Green, knew that his annual bonus depended on exceeding budgeted profit and that his bonus would plateau at 10 percent above budgeted profit. Ray expected that next year's profit plan would be similar but that next year's budget would consider the changes in the product lines. Ray discovered that he could accrue some of next year's expenses and defer some of this year's revenue while still exceeding budgeted profit by 10 percent.

Required Why would Ray Green, Doak's controller, want to defer revenue but accrue expenses? Is this ethical?

Explanation / Answer

This is an unethical practice. Since Ray had earned the bonus in the current year and because of the changes or increase in its costs, he predicts that in the next year he harder to get bonus. Ray must perform his professional duties with competence. He must prepare reports in accordance with technical standards and generally accepted accounting principles. Revenues and expenses must be matched to the correct period to which they belong

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