Reference no: EM132814876

On January 22, Thomas Naylor, the accountant for Action, Inc. , is being pressured to complete the December 31, year-end, financial statements. The company president tells Naylor that she needs "up-to-date" financial statements to present to the bank on January 23. The meeting with the bank has been called because Action has applied for a loan to finance an upcoming project. Thomas knows that he will not be able to gather all the information required to make accurate adjusting entries within the next 24 hours. Those entries must be posted in order for the statements to be accurate. After much thought, Thomas decides to estimate several of the expenses. Thomas uses low estimates because he does not want to make the financial statements look worse than they already are. By estimating the expenses, Thomas was able to complete the financial statements prior to the January 23 deadline, however, he did not inform the president that he used low expense estimates.

Problem 1: What impact does the low estimates have on the financial statements?

Problem 2: Are there ethical issues in this case for Thomas and/or the president? If so, what are they?

Problem 3: What would you do in this situation if you were Thomas?