Question
Far-2-Ezy (F2E) makes loans to high-risk borrowers. F2E borrows from its bank and then lends money to people with bad debt histories. The bank requires
Far-2-Ezy (F2E) makes loans to high-risk borrowers. F2E borrows from its bank
and then lends money to people with bad debt histories. The bank requires F2E to
submit quarterly financial statements in order to keep its line of credit. F2E's
main asset is Bills Receivable. Therefore, Uncollectable Bills Expense and
Allowance for Uncollectable Bills are important accounts.
Katie Bamber (KB), the owner of F2E wants net profit to increase in a smooth
pattern, rather than increase in some periods and decrease in others. To smooth
out increasing net profits, Katie underestimates Uncollectable Bills Expense in
some periods when net profits don't fit the smooth increasing pattern. In other
periods, Katie overestimates the expense. She reasons that over time profit over
statements roughly cancel out profit under statements.
Required
Use the stakeholder analysis framework described in Chapter 1, to analyse if
there is an ethical dilemma if Bamber smooths out profits. Make reference to
accounting standards, disclosure and any laws applicable in your analysis.
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