Ethics and Revenue and Expense Recognition
Response to the following problem:
You are employed by a local CPA firm, and one of your clients is Tiger Manufacturing Company
Tiger has been very successful in recent years, averaging approximately 10% increase in earnings each year. The company is planning a public stock offering early next year, which would bring significant fees to your firm. It would also allow the company to finance a much needed expansion that would allow the company to hire additional employees.
The audit is nearing completion, and it appears that the company will again report a significant increase in earnings. However, two issues have arisen. First, the company has a large order from a purchaser to be shipped FOB shipping point in early January. The inventory was completed and warehoused late in December, but it was not segregated. Management has included the selling price (less the related expense) in the current year's net income. Second, the company has added capitalized interest to the cost of two large special orders that are nearing completion. If both these issues are resolved in a way that decreases net income, the company's net income will be lower than the amount reported last year.
Required:
From financial reporting and ethical perspectives, discuss the issues raised by this situation.