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Question - Susan Fields is the controller of Sunset Travels, a publicly traded company. The assets of the company currently total $1,400,000 and total debt is at 3,000,000. The company is required to maintain a debt to asset ratio of not more than 50% for their bank covenant. They are currently being sued for damages of $150,000 by a customer who was injured while on an excursion he purchased from Sunset travels. Sunset Travel lawyers have told Susan that it is likely they will have to pay the damages from the lawsuit, but will not know the exact amount until they go to court.
Susan is trying to decide whether to include the lawsuit in the financial statements. Jeff Gold, the new CEO, is insisting that the lawsuit does not need to be included in the financial statements since they have not had their court date yet.
Required -
(a) Name two financial statement users in this scenario and the financial reporting objective for each user.
(b) Why did the CEO insist on excluding the lawsuit from the financial statements?
(c) Does the CEO's request pose an ethical dilemma for the controller? If so, why?
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