The controller of Gomez Corporation believes that company's yearly allowance for doubtful accounts should be 2% of net credit sales. The president of Gomez Corporation, nervous that the stockholders might expect the company to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 4%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Gomez Corporation.
Question:
Explain the problem in details (don't assume your reader has seen the question) and answer the question as a writing assignment. Carefully explain the president's suggestion so it is clear what he is attempting to accomplish by having the allowance account estimate set at 4%. Be sure to use a specific illustration, so it is clear how the president's desired result is to be achieved. Be sure it is clear what the president's worry is. AFTER you have done this, then go on to answer (a) - (c).
(a) Who are the stakeholders in this case?
(b) Does the president's request pose an ethical dilemma for the controller?
(c) Should the controller be concerned with Gomez Corporation's growth rate in estimating the allowance? Explain your answer.