Y&D Audio Warranty Policies: Accrual Estimates and Ethical Decision-Making
This case raises a number of issues related to the exercise of managerial judgment in financial reporting. Specifically, the case requires students to estimate the warranty expense for a start-up company and requires the explicit consideration of the ethical issues that arise in the estimation process. Students are forced to consider the trade-offs that occur when estimating warranty expense: the impact on accounting earnings, materiality, income vs. cash flows, earnings management, ethical decision-making, and entrepreneurship. This case is excellent when used to introduce and discuss accrual accounting and the logic for estimating expenses. The case is used in the first year Financial Reporting course in the Babson MBA program after students have taken an on-line module in ethical decision-making. With the appendix, it is also used in the Babson undergraduate first-year course, Introduction to Financial Accounting. While an ethics-learning unit is not necessarily a pre-requisite for the case, students will need to have been exposed to the three philosophies of ethical thought referred to in the case (Duty, Consequences, and Character) and included as an appendix to the case.