American Accounting Association DOI: 10.2308/iace-50124
How Adjusting Entries Affect the Quality of Financial Reporting: The Case of Frosty Co.
Jason C. Porter
ABSTRACT: Recent accounting scandals have emphasized the need to think beyond debits and credits. Accounting students must understand the effects of transactions on a company’s financial position, as well as the pressures and incentives they will someday face to misrepresent that position. This case introduces students in intermediate financial accounting courses to both of these important objectives. First, the case improves students’ critical thinking skills in accounting by allowing them to determine if various correcting entries should be made, and what the effects of those transactions will be on the company’s financial statements. Second, the case improves students’ ability to evaluate ethical consequences by introducing them to conflicting incentives regarding those corrections: the obligation to provide investors with high-quality financial statements that fairly present the company’s financial position versus the pressure to maintain a high stock price for investors. The case may be completed using either U.S. GAAP or IFRS. Keywords: adjusting entries; ﬁnancial statement adjustments; accounting cycle; ratio analysis; IFRS.
BACKGROUND INFORMATION rosty Co. is a publicly traded, medium-sized manufacturing ﬁrm that produces refrigerators, freezers, ice makers, and snow cone machines. During the past three years, the company has struggled against increasing competition, sluggish sales, and a public relations scandal surrounding the departure of the former Chief Executive Ofﬁcer (CEO) and Chief Financial Ofﬁcer (CFO). The new CEO, Jane Mileton, and CFO, Doug Steindart, have worked hard to improve the company’s image and ﬁnancial position. After several difﬁcult years, the company now seems to be resolving its difﬁculties, and the
References: Issues in Accounting Education Volume 27, No. 2, 2012 518 Issues in Accounting Education Volume 27, No. 2, 2012 520 Issues in Accounting Education Volume 27, No. 2, 2012 522