Reference no: EM131307252

Using what you've learned from this phase, compare accrual accounting to cash flow accounting. Discuss the strengths as weaknesses of each. Consider how each accounting system impacts a company's strategy formation and the decision makers' degree of freedom. When evaluating the pros and cons of these two methods of accounting, remember to include the ethical and legal compliance implications. Consider the following example:

Mary manages a large pet supply company. After a particularly slow year, she's anxious to boost sales over the winter holidays. After considerable research, she finds a deal on a six month set of TV commercials. In order to ensure that her commercials will cover the holidays and help her company through the usual new year sales dip, she decides on a plan that will air her commercials from October through December of 2013, and January through March of 2014.

Mary's new to the accrual method, but she believes that she should include half of the expenses on her 2013 report, and half on her 2014 report. However, she hopes that 2014 will be a more profitable year, thanks to her new commercials. With this in mind, she's considering recording the entire expense in 2014, rather than 2013. If she's correct and 2014 does turn out to be more profitable, her company's net income will appear better than it actually is.

Mary believes her strategy will impress her investors and give her a company a competitive edge, but she's worried about whether or not her actions are ethical and legal.

Would her actions be Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) compliant? Will Mary's decision set a precedence that may hinder strategic options in the future? Will it distort actual performance in a meaningful way that might confuse or deceive value chain partners that depend on Mary's reports? What would you do if you were in Mary's situation?

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