Miagi's auto showroom sells cars. Miagi's bank requires the company to submit quarterly financial statements in order to keep its line of credit. Notes Receivable and Accounts Receivable are 60 percent of current assets. Therefore, Bad Debt Expense and Allowance for Doubtful Accounts are important accounts.
Miagi's president, Ed Edwards, likes net income to increase in a smooth pattern rather than to increase in some periods and decrease in other periods. To report smoothly increasing net income, Edwards underestimates bad debt expense in some accounting periods. In other accounting periods, Edwards overestimates the expense. He reasons that the income overstatements roughly offset the income understatements over time.
Required
Is Miagi's practice of smoothing income ethical? Give your reasons, mentioning any accounting principles that might be violated.