Title: Ethics Assessment #3 Answer Key
Course: SkillsCom BA 211 15.0 > Section: Credit Unit 3 Module 3

Ethics in Action

Case #1

Requirement 1.

- Accrued liabilities arise in the adjustment process under accrual accounting. The matching principle requires that expenses be properly matched to revenues in the period in which they were incurred. Thus, the expense and related liability are recorded and reflected on the current period financial statements. This impacts the income statement by increasing expenses and the balance sheet by increasing liabilities.
- No, these are properly accrued liabilities for expenses incurred in the current period. There would be no reason to remove these accrued liabilities.

Requirement 2.

- Don does have a valid business reason for reducing the estimated warranty percentage. If the addition of this new lubricant has actually contributed to a drastic reduction in warranty repairs then a reduction in the estimated warranty expense and accrued liability can be justified.
- The accountant has expressed a valid concern. If the underlying reason for reducing the warranty percentage is merely to improve the financial statements then the percentage should not be changed. The accountant wants to ensure that the financial statements reflect the business activity in order to provide reliable information for decision makers. Accordingly, the accountant does not want to provide any misleading information.