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Questions and Answers
What are ethical challenges in accrual accounting?
What are ethical challenges in accrual accounting?
Business transactions or events can mislead stakeholders, and accountants must provide complete and accurate information.
Understating expenses to inflate profit on the income statement is an ethical practice.
Understating expenses to inflate profit on the income statement is an ethical practice.
False
Failing to record ______ would overstate profit as calculated by mandated accrual principles.
Failing to record ______ would overstate profit as calculated by mandated accrual principles.
depreciation expense
What risk does a banker face when a business understates expenses?
What risk does a banker face when a business understates expenses?
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Study Notes
Ethical Challenges in Accrual Accounting
- Business transactions can create ethical dilemmas for accountants, requiring honesty and accurate information.
- Accurate data helps people make informed decisions.
- Smart Touch, a business seeking a loan, is used as an example.
Example Scenario
- Smart Touch, a successful business, wants a $30,000 loan to open a new office.
- To inflate reported profits, the e-learning business might understate expenses.
- This misleading information could lead a bank to lend money.
- If the business cannot repay the loan, the bank loses money because it relied on false financial information.
Unethical Accrual Accounting Practices
- Accrual accounting can be misused for unethical gain.
- An example is omitting depreciation expenses at the end of the financial year.
- Omitting depreciation inflates profits and presents a false positive financial image.
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Description
Explore the ethical dilemmas faced by accountants in accrual accounting through the case of Smart Touch, a business seeking a loan. Learn about the implications of providing misleading financial information and the potential consequences for both businesses and banks. This quiz highlights the key aspects of ethical practices in financial reporting.
