Management Accounting Case Study: Linbarger Company Ethical Dilemma

This case study delves into the accounting challenges faced by the Linbarger Company, specifically concerning the timing of revenue recognition under accrual accounting and the ethical implications of manipulating financial reports. The assistant controller must decide whether to follow instructions that could misrepresent the company's financial position to meet loan agreement requirements. The analysis covers the conflict between cash and accrual accounting, ethical responsibilities, and the potential negative impacts of non-compliance, especially concerning the company's relationship with its lenders. The assignment explores alternative solutions, such as transparent reporting and disclosure. The case study emphasizes the importance of accurate financial reporting and ethical behavior in maintaining stakeholder trust and the company's financial stability.

MANAGEMENT ACCOUNTING

Question 1. What is the accounting problem that the Linbarger Company faces?
Solution :
Under the accrual basis of accounting, revenue is recorded when it is actually earned and not
when the cash is received. As per the given case of Linbarger Company, accounts receivables
shows a balance of $150,000 by Oconto Distributors which must have been recorded when the
sales was made to it. However, the said amount cannot be shown as received in the cash or bank
account until and unless it has been actually received under cash basis of accounting. Thus, in
terms of accounting, where Lisa Infante asks to keep the cash receipts book open for an
additional day doesn't go with the norms of the loan agreement. Also, even though the mail
serves as a proof that the required cheque would reach the company in a day which us after the
reporting day, it can still not update its cash balance with the said amount as it would then go
against the accounting norms. (Berry, 2009)
Question 2. What are the ethical considerations in this case? Provide rationale for why these are
ethical considerations.
Solution:
It is the duty of the assistant controller to provide accurate financial reports to the stakeholders
that provides true and transparent financial conditions about the company as in case anything
goes wrong, the entire integrity of the company would be questioned, his reputation would be
threatened and public confidence in the company would fade. Thus, financial reports that provide
true and fair view of the company's scenario is more of an ethical consideration for the assistant
controller as it directly affects the trust of the stakeholders. (Atkinson, 2012)
Question 3. What are the negative impacts that can happen if you do not follow Lisa Infante’s
instructions to wait one more day to post the balance?
Solution :
As per their loan agreement with the insurance company, one of the most required conditions is
maintenance of minimum $200,000 as cash balance in every monthly report. However, the
amount was $80,000 for the June report that would negatively impact their agreement with the

insurance company. On the same hand, it would raise questions on the credit ability of the
company and that the company's operations aren't upto the mark or they might not be making the
correct use of the loan amount given to them. Thus, as per the current case, not following Lisa's
instructions would negatively affect the company's status or its relation with the insurance
company as stated above.
Question 4: Who will be negatively impacted if you do comply? Provide a rationale for why
these individuals will be impacted.
Solution: As per the scenario, the company would be negatively impacted. It can be fairly
predicted from the given scenario that the loan from the insurance company forms a major part
of their capital. Thus, it is vital for the company to comply with the every condition of the loan
agreement for the smooth functioning of their company. (Seal, 2012) Due to not being able to
maintain any of the conditions, the company's integrity and ability comes under question. It
somewhere shakes the confidence of the lenders or investors as it is a matter of their trust
invested in terms of finance in the company. Where a company is considered as an association of
people, anything that goes wrong affects the people working in it.
Question 5. What is one alternative that you could pursue in this scenario? Support your
recommendations with information you learned in this class.
Solution :
As an assistant controller, it would be advisable to represent the financial reports as the case is,
that is, a true and fair view along with an explanation of why the cash balance is short of the
minimum requirement and that the company would meet the requirement in one or two days as
one of their customers has already sent the cheque which didn't reach them before the date of
monthly report. After so many accounting scandals, financial reporting just expects reliable
information and appropriate disclosures. (Menifield, 2014)

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Menifield, C. E. (2014). The Basics of Public Budgeting and Financial Management: A
Handbook for Academics and Practitioners. Lanham, Md.: University Press of America.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.