1. The balance sheet reports the assets liabilities and owner’s equity of the entit6yat a
particular date. The assets are the resources the business must work with. Liabilities
are debts. Owners equity is the portion of the business assets owned outright by the
owner.
The income statement reports the revenues and the expenses of a particular entity for
a period such as a month or a year. Total revenue- total expenses=net income (or net
loss)
2. a) What is the fundamental ethical issue in this situation? (Challenge)
Is letting financial statements tell the truth about the company’s performance.
Performance was bad and financial statements should present bad picture
b) Discuss how Wai Lee’s proposals violate generally accepted accounting principles.
Identify each specific concept or principle involved.
Principles: Reliable, consistent, understandability, comparability, timeless.
The proposal to transfer personal assets temporarily to the company violates the
entity concept. The president implies that these assets can be transferred back to him,
and the “investment” appears designed to make the company’s financial position
appear better than it is. This is dishonest and unethical.
The request to “share expenses” violates the reliability principle. The president wants
the accountant to understate expenses in order to convert a loss into a reported
income. This is dishonest and unethical.
3. a) What ethical issue would you face as you consider what to report in your company’s
annual report about the cash payments? What is the ethical course of action for you to
take in this situation?
The chief financial officer of Philip Morris would be torn between telling the truth
about the reason of the payments vs trying to downplay the negative effects in the
companys annual report. The ethical course of action for the CFO is to tell the truth.
b) What are some of the negative consequences to Philip Morris for not telling the
truth? What are some of the negative consequences to Philip Morris for telling the
truth?
Negative consequences of not telling the truth include Philip Morris losing its
reputation for honesty in its financial reports. Investors might stop investing if they
suspect that the company´s financial statement do not tell the truth. Negative
consequences of telling the truth include painting a black picture of the effects of
smoking that investors will see the investment as a very risky operation and will stop
buying the company´s stock.
Real Madrid Case
1) Does the article refer to Real Madrid´s wealth (financial position)? Yes
2) Does it refer to wealth generated (company performance) by Real Madrid? No
