Key,Inc.,manufactures key rings and “dummy”keys for football fans to shake and rattle at opportune times during football games.These items are sold to sports specialty shops and sidewalk vendors during the football season.The company’s fiscal year ends December 31 each year. In 1999, just before the “bowl” season, the company received orders and payment for $23,000 worth of keys and key rings.The goods will be manufactured and shipped on January 1, 2000, just in time for the major bowl games later that day.The effects these orders have in December 1999 on key’s balance sheet equation is as follows:

STATEMENT OF CASH FLOWS 187 Ethics The company’s overall financial results,summarized under the accounting equation, were ASSETS LIABILITIES SHAREHOLDERS’ EQUITY Cash $23,000 Sales Revenue $23,000 Required

a. Show how the $23,000 in December 1999 orders should have been recorded.

b. Reconstruct the income statement, showing how it might have appeared without the inclusion of the $23,000 in December orders. For this purpose, assume that the expenses associated with the orders were $11,000.

c. Show how the balance sheet would have changed if the $23,000 in orders had been recorded correctly.Why might Key management be unhappy with these results?

d. Discuss the ethical problems inherent in this situation for the company,for its financial managers, and for its auditors.