Accounting Question
Accounting Question
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Using the guidance discussed in class as well as materials within the textbook, consider the following 2 ethical cases and respond to the questions noted (total of 7 questions). Responses will be graded for thoughtfulness and rationale (a yes/no response is not sufficient). Questions 3, 5, and 6 are worth 2 points each. All other questions are worth 1 point each.
Ethics Case #1
Banks charge fees for “bounced” checks—that is, checks that exceed the balance in the account. Fees they charge are often around $30 each. It has been estimated that processing bounced checks costs a bank roughly $1.50 per check. Thus, the profit margin on bounced checks is very high. Recognizing this, some banks have started to process checks from largest to smallest. By doing this, they maximize the number of checks that bounce if a customer overdraws an account. For example, NationsBank (now Bank of America) projected a $14 million increase in fee revenue as a result of processing largest checks first. In response to criticism, banks have responded that their customers prefer to have large checks processed first, because those tend to be the most important. At the other extreme, some banks will cover their customers’ bounced checks, effectively extending them an interest-free loan while their account is overdrawn.
| 1. | Richard Coulsen had a balance of $1,500 in his checking account at First National Bank on a day when the bank received the following five checks for processing against his account.
Assuming a $30 fee assessed by the bank for each bounced check, how much fee revenue would the bank generate if it processed checks (1) from largest to smallest, (2) from smallest to largest, and (3) in order of check number? |
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| 2. | Do you think that processing checks from largest to smallest is an ethical business practice? Why or why not? |
| 3. | In addition to ethical issues, what other issues must a bank consider in deciding whether to process checks from largest to smallest? |
| 4. | If you were managing a bank, what policy would you adopt on bounced checks? Why? |
Ethics Case #2
As its year-end approaches, it appears that Ortiz Corporation’s net income will increase 10% this year. The president of Ortiz Corporation, nervous that the stockholders might expect the company to sustain this 10% growth rate in net income in future years, suggests that the controller increase the allowance for doubtful accounts to 4% of receivables in order to lower this year’s net income. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate of growth for Ortiz Corporation in future years. The controller of Ortiz Corporation believes that the company’s yearly allowance for doubtful accounts should be 2% of receivables.
| 5. | List three stakeholders (companies or people harmed or benefited) in this case? |
| 6. | Does the president’s request pose an ethical dilemma for the controller? Be specific in what dilemmas are present, if any. |
| 7. | Should the controller be concerned with Ortiz Corporation’s growth rate in estimating the allowance? Explain your answer. |
