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Corporations and Stockholders’ Equity Case Studies Report

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Updated: Dec 12th, 2019

Introduction

Shareholders provide capital to ensure smooth running of an organization. Therefore, they have certain right, obligations and powers in the running of an organization. Similarly, board of directors and employees has duties in the organization. Their conducts are guided by profession code of ethics and conduct.

Ethics denote a set of laws which regulate a certain profession. The paper discuses ethical concerns in two cases which involve shareholder, accountant and board of directors. It points out the ethical issues and suggests prudent ways of handling the issues.

Case one

A shareholder provides equity financing to a company. It is ethically correct for a shareholder to provide money to the company either as way of debt or equity. Therefore, a shareholder can lend money to the company at an interest. The shareholder can borrow funds or use savings to fund the loan.

There is no any statutory condition to this transaction except that charges to secure the borrowing must be registered with the registrar of companies. The only ethical issue would be on the interest rate. Ted should lend money to the company at market rate and not at his preferred rate of interest.

However, there are certain conditions that Ted must meet in order to obtain a tax relief on the interest rate. First, he must own over 5% of shares of the company or have acted in the capacity of a management for a long time. Secondly, the company must be a private company (Behan Legal 1).

A stakeholder can ethically be a customer of a business. This should be done within normal purchases of the company’s commodities. In the case, Ted’s intention was to buy commodities so as to reverse the anticipated poor performance at year end. This action is unethical since it amounts to manipulation of earnings of the company.

A purchase of merchandise worth $250,000 would lead to robust sales in the month of December, an increase in income and provide enough cash to meet the expenses. This amounts to manipulating the earnings and financial statements of the company thus unethical. Therefore, stockholder cannot ethically become a customer in order to make purchases just to improve the sales and net income.

The amount of the purchase is of utmost importance since it helps in gauging whether the sales are normal or have a material impact on the financial statements of the company.

The CEO was concerned since ethical behavior is a strong tenet in business relations thus, an individual or a business should not make unfair gains in business. Besides, professionals must adhere to the professional code of conduct and ethics in any line of business.

Further, the CEO was aware that manipulating the financial statements would mislead the users and other stakeholders. Therefore, the CEO had genuine ethical concerns (Behan Legal 1).

Case two

Declining stock prices of a company are a bad indication of the performance of the company because share prices show the health of the company. More than often, it indicates a decline in profitability or existence of too much debt. Considering the fact that the share prices are declining, the board of Atlantic Corporation is worried about the profitability of the company.

Therefore, they view that recording the $80 million as a gain would boost the profitability of the company and thus increase the value of the company and share prices. On the other hand, the accountant is guided by the Generally, Accepted Accounting Principles which gives guidelines on how to treat buying back and reissue of shares (Brigham and Joel 56)

In the case study, it is evident that the Board of directors did not cancel or retire the shares after buying them back. Therefore, any transaction involving the treasury stock would only affect the treasury account and balance sheet not the profit and loss account.

The accounting entries for buying back the shares are to debt the stakeholder equity by $62 million and credit cash by the same amount. This reduces the shareholders’ equity. Upon reissue of share, debit cash by $142 million, credit the treasury stock account by $62 million and credit paid – in – capital by $80 million.

Therefore, the accountant was right with his entries. The ethical concern is that a company cannot trade with its own shares and treat the gains arising from such trade as profits (Brigham and Joel 60)

The board of directors is not right about whether the stock was Atlantic Corporation stock or any other company since all stock is the same. The two stocks are not similar since stock of Atlantic Corporation is the capital of the company and forms a significant element of the balance sheet.

Gains and losses from trading with the company’s stock are charged in the paid-in-capital account. Stock of other companies is an investment and is thus treated as assets. Gains and losses of such stocks are charged to the profit and loss account (Brigham and Joel 57).

Conclusion

Ethics is of utmost importance in business relationships. An individual or a business should not make unjustified gains in the process of trade. Further, manipulation of books of account in whatever way is unprofessional and unethical because the financial statements are relied upon by several users.

Adherence to the Generally Accepted Accounting Principles is mandatory when recording all transactions. Accountants should not be coerced to violate accounting principles since it is a manipulation of books of accounts. Such cases should be reported to the relevant regulatory authorities where necessary.

Works Cited

Behan Legal 2007. Director & Shareholder Rights & Obligations. PDF file. 07 Jan 2013. Web.

Brigham, Eugene, and H. Joel. Fundamentals of Financial Management, USA: South- Western Cengage Learning, 2009. Print.

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IvyPanda. 2019. "Corporations and Stockholders’ Equity Case Studies." December 12, 2019. https://ivypanda.com/essays/corporations-and-stockholders-equity-case-studies-report/.

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IvyPanda. (2019) 'Corporations and Stockholders’ Equity Case Studies'. 12 December.

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