Questions: Suppose a company incurred 1 million in expenses related to the restructuring of its business. These expenses related to store closings and severance pay for terminated employees. Because the restructuring is going to cause the company to have a "bad year," the CFO would like to make it a "really bad year." The CFO encourages the chief accountant to over-estimate certain expenses and charges. The CFO explains, "If we take the extra charges this year, then we don't have to report those charges in future years." Required: 1. Understand the reporting effect: If the chief accountant follows the CFO's request, how will net income be affected in the current year? How will it be affected in future years? 2. Specify the options: If the chief accountant does not follow the CFO's request, how is the balance of retained earnings affected in the current year? 3. Identify the impact: Are investors and creditors potentially harmed by the CFO's suggestion? 4. Make a decision: Should the chief accountant follow the advice of the CFO? 1. Net income will be in the current year and in future years. 2. The balance of retained earnings will be in the current year. 3. Are investors and creditors potentially harmed by the CFO's suggestion? 4. Should the chief accountant follow the advice of the CFO?

Let's address each of the required points in turn:

1. Understand the reporting effect:

   • Current Year: If the chief accountant follows the CFO's request to over-estimate certain expenses and charges, the net income for the current year will be significantly lower. This is because the additional expenses will reduce the overall profit.
   • Future Years: In future years, net income will be higher than it would have been if the expenses had been reported accurately. This is because the over-estimated expenses taken in the current year will not need to be reported again, effectively reducing future expenses and inflating future profits.

2. Specify the options:

   • Current Year: If the chief accountant does not follow the CFO's request and reports the expenses accurately, the balance of retained earnings will be lower in the current year. This is because the actual expenses related to restructuring will reduce the net income, which in turn reduces the amount of profit that can be retained.

3. Identify the impact:

   • Investors and Creditors: Yes, investors and creditors are potentially harmed by the CFO's suggestion. Over-estimating expenses in the current year can mislead investors and creditors about the company's true financial health. Investors might make poor investment decisions based on inaccurate financial statements, and creditors might extend credit under false pretenses, not realizing the company's actual financial situation.

4. Make a decision:

   • Ethical and Legal Considerations: The chief accountant should not follow the advice of the CFO. Over-estimating expenses to manipulate financial results is unethical and likely violates accounting standards and regulations. Accurate financial reporting is crucial for maintaining the integrity of financial markets and ensuring that all stakeholders have a true and fair view of the company's financial position.

To summarize:

1. Net income will be lower in the current year and higher in future years if the chief accountant follows the CFO's request.
2. The balance of retained earnings will be lower in the current year if the chief accountant does not follow the CFO's request.
3. Investors and creditors are potentially harmed by the CFO's suggestion.
4. The chief accountant should not follow the advice of the CFO.