Assignment 2 Discussion: Ethical Issues Review 845834

Assignment 2 Discussionethical Issuesreview The Ethical Issue Dobbs

Review The Ethical Issue Dobbs Wholesale Antiques in chapter 5 (Page 317). By Saturday, July 8, 2017, address the following in your initial post: Under Dobbs FOB policy, when should the company record a sale? Do you approve or disapprove of Dobbs's manner of deciding when to ship goods to customers and record the sales revenue? If you approve, give your reason. If you disapprove, identify a better way to decide when to ship goods. Is there an accounting rule against Dobbs's practice? By the end of the week, provide substantive responses to at least two other students' initial posts.

Paper For Above instruction

The ethical issue at the heart of Dobbs Wholesale Antiques revolves around the timing of recognizing revenue under the company's Free on Board (FOB) policy. Specifically, the question pertains to when Dobbs should record a sale—whether this should occur when the goods are shipped or at another point in the transaction process. This discussion critically examines Dobbs’s practice of recording sales and evaluates whether their approach aligns with generally accepted accounting principles (GAAP), alongside ethical considerations surrounding revenue recognition.

Understanding FOB Policy and Revenue Recognition

FOB, or Free on Board, policy determines the point at which ownership and risk transfer from seller to buyer. Under FOB shipping point terms, ownership transfers when the goods leave the seller’s premises, whereas under FOB destination, ownership transfers when the goods reach the buyer’s location (Weygandt, Kimmel, & Kieso, 2018). Knowing this, Dobbs Wholesale Antiques should recognize revenue at the point of transfer, in accordance with the FOB policy specified in their sales agreements.

Dobbs’s Practice of Recording Sales

Dobbs's practice involves recording a sale at the point when they ship goods to customers. If their policy states FOB shipping point, this approach is consistent with accounting standards, as it recognizes revenue when the risk and rewards transfer to the buyer. However, if Dobbs's policy is FOB destination but they recognize revenue upon shipment, this would be an inconsistency and an ethical issue, potentially overstating income and misrepresenting their financial position (Financial Accounting Standards Board [FASB], 2014).

Approval or Disapproval of Dobbs’s Method

I approve of Dobbs recording sales when the goods are shipped, provided their FOB policy is shipping point. This approach aligns with GAAP and reflects the economic reality of when the seller's risks and rewards pass to the buyer. Recognizing revenue at shipment ensures that income is only recorded when control has been transferred, maintaining the integrity of financial statements (Kieso, Weygandt, & Warfield, 2019).

However, if Dobbs ships goods prior to the transfer of risks associated with FOB destination, disapproval would be warranted because it would violate revenue recognition principles and could be viewed as an effort to inflate sales figures prematurely. In this context, a better method involves confirming that revenue is recognized only when the critical risks and rewards have transferred as per the contractual FOB terms.

Are There Accounting Rules Against Dobbs’s Practice?

Yes, accounting standards such as GAAP explicitly stipulate criteria for revenue recognition. According to the FASB’s Accounting Standards Codification (ASC) Topic 606, revenue should be recognized when control of the goods transfers to the customer, which is typically aligned with FOB shipping point or destination, depending on the agreement (FASB, 2014). If Dobbs's practice deviates from this established guidance by prematurely recognizing revenue before the transfer of control, it could be considered a violation of accounting rules and could lead to misleading financial statements and potential legal consequences.

Ethical Implications and Best Practices

From an ethical perspective, adhering to GAAP and consistent revenue recognition policies is crucial to maintain transparency, prevent manipulation of financial results, and uphold trust with stakeholders. Manipulating the timing of sales recognition to inflate income can undermine the integrity of financial reporting and violate principles of honesty and fairness (Guiso, Sapienza, & Zingales, 2018).

To improve the ethical standards in revenue recognition, Dobbs should implement clear internal controls ensuring that sales are only recorded when the transfer of control aligns with their FOB terms and contractual obligations. Training staff and regularly auditing revenue transactions can further reinforce compliance with ethical and accounting standards (Healy & Palepu, 2012).

Conclusion

In conclusion, Dobbs Wholesale Antiques’s timing of recording sales should strictly follow their FOB policy and accounting standards. Recording revenue at shipment is appropriate when FOB shipping point applies; otherwise, recognition should be delayed until transfer of control. Ensuring adherence to GAAP not only avoids legal repercussions but also sustains ethical integrity and stakeholder trust. Companies must balance operational needs with compliance to ethical standards to foster sustainable and truthful financial reporting.

References

• Financial Accounting Standards Board (FASB). (2014). Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers (Topic 606).
• Guiso, L., Sapienza, P., & Zingales, L. (2018). The Value of Corporate Culture. Journal of Financial Economics, 132(3), 422-440.
• Healy, P. M., & Palepu, K. G. (2012). Business Analysis & Valuation: Using Financial Statements, Text and Cases. Cengage Learning.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting (10th ed.). Wiley.