ACCA109

CASE STUDY #3

Fidelson, Guinoo, Inacay and Pacis

 CASE 3
The net income of Cruz’, a department store,
decreased sharply during 20x5. Mark Cruz, owner of
the store anticipates the need for bank loan in 20x6.
Late in 20x5, he instructed the accountant to record a
P26,000 of furniture to the Cruz family, even though
the goods will not be shipped from the manufacturer
until January 20x6. Cruz also told the accountant not
to make the following December 31, 20x5 adjusting
entries:

Salaries owed to employees- P18,000

Prepaid Insurance that has expired- P5,300
 01 02 03
Why did Cruz take this
Compute the action? Is this action As a personal friend,
overall effect of ethical? Give your what advice would
these transactions reason identifying the you give the
on the store’s parties helped and accountant?
reported income for parties harmed by
20x5. Cruz’ action.
1. Compute the overall effect of
these transactions on the
store’s reported income for
20x5.

The overall effect of the transaction on the store’s income for

20x5 is an overstatement of P49,300.

● Expense (understated) - P5,300

● Liabilities (understated) - P18,000

These understatements will lead to the understatement of the

operating expenses. The P26,000 furniture increases the income
as well as the asset, as it is a sale from the furniture that the Cruz
family bought from their store.
2. Why did Cruz
take this action?
Is this action ethical? Give
your reason identifying the
parties helped and parties
harmed by Cruz’ action.
The actions were UNETHICAL
The department store’s income
●
decreased sharply in 20x5, Mr. Cruz
was desperate to rise back from its
loss
● Personal interest to get a loan from
the bank
● Since Mr. Cruz was anticipating a
bank loan, he opted to take this
unethical action considering that
the amount of bank loan that will be
given depends on the capabilities of
the company to return the loan with
its interest.
2. Why did Cruz
take this action?
Parties harmed
● Accountant
Is this action ethical? Give ● Employees, and
your reason identifying the ● The stakeholders/ investors
parties helped and parties
harmed by Cruz’ action.
Parties helped
● Mr. Cruz alone and
● The company itself in the short run
3. As a personal friend, what
advice would you give the
accountant?
The accountant is facing a moral dilemma since
he/she is facing a two conflicting options, it is to follow
his/her boss or to do what is right in which either way is
a hard option.
● For the first option: if the accountant follows the boss,
he/she will get involve for commiting a fraud by falsifying
the financial statements.
● For the second option: the accountant could disagree
with the boss and do what is right however this could led
to the company's downfall or worst to bankruptcy.
 As an accountant, it is your
ethical responsibility to be
honest in preparing accurate
financial information, should not
allow bias and conflict of interest
of others to override professional
or business judgement.
That is all, thank you!

Group 3