Ethics and Income Reporting
Response to the following problem:
You have been hired as an "accounting consultant" by Watson Company to evaluate its financial reporting policies. Watson is a small corporation with a few stockholders owning stock that is not publicly traded. In a discussion with you, Chris Watson, the company president, says "For the Watson Company's annual income statement, it is our policy to always record and report revenues when we collect the cash and to record and report expenses when we pay the cash. I like this approach, and I think our stockholders and creditors do, too. This policy results in income that is reliable and conservative, which is the way accounting should be. Besides, it is easy to keep track of our income. All I need are the receipts and payments recorded in the company's checkbook."
Required
From financial reporting and ethical perspectives, how would you reply to Chris?