Mary Burden is the CFO of Tidewell Corporation and Tommy Brown is the Treasurer. Mary has been with the company for seven years and Tommy just started earlier this year. They meet to discuss the classification of the corporation's investment portfolio.

Mary notes that Tidewell Corporation is having a good year and net income is already more than was forecasted, so she proposes investments that have increased in value since last year be classified as available-for-sale. She also proposes that any that have decreased in value be classified as trading securities. Her logic is that this will result in some amount of reported loss, but that net income will still be more than forecasted. Also, by classifying the securities that have increased in value as available for sale, Tidewell Corporation will have some reserve gains for future periods.

Tommy is not sure about Mary's proposal and thinks it would make more sense to classify the investments that have increased in value as trading, and subsequently sell them to capture the profit. He also believes that classifying the investments that have decreased in value as trading makes more sense, which will give the investments time to recover and not impact net income.

Answer the following questions:

1. Will what Mary and Tommy each suggest have the effect on net income that they suggest? Why or why not?
2. Is what Mary and Tommy each propose ethical? Why or why not?
3. If Tommy prevails and they classify the securities as he proposes for the end of the year, what would you expect Tidewell Corporation to do with the two types of investments shortly after the classification decision is made?
4. If what should happen in #3 doesn't occur, is the classification decision ethical? Why or why not?
5. Does either of their proposals violate SEC or GAAP regulations? Why or why not?