Accounting?

Question

The net income of Simon and Hobbs, a department store, decreased sharply during 2000. Carol Simon, owner of the store, anticipates the need for a bank loan in 2001. Late in 2000, Simon instructs the store's accountant to record a $10,000 sale of furniture to the Simon family, even though the goods will not be shipped from the manufacturer until January 2001. Simon also tells the accountant not to make the following December 31, 2000 adjusting entries:

Salaries owed to employees: $900
Prepaid insurance that has expired: $400

Why is Simon taking this action? Is her action ethical? Give your reason, identifying the parties helped and the parties harmed by Simon's action.

Answer 1

1. She's doing this to try and boost her income by recording sales in a period they weren't earned, furthermore she's also the one funding the sale. Shes lowering her expenses to boost income by not recording employee salaries expense in the period and shes boosting assets by not removing a prepaid asset such as the insurance. It's an effort to boost income and equity to achieve better credit for the loan she wants.

2. Ethical? NOT EVEN CLOSE. In fact this considered fraud.

3. The bank is harmed because they loan money to her based on incorrect information and have considered her a lower risk than she really is which means they are probably giving her a lower interest rate. Any investor in the come could potentially be harmed as they will see incorrect information about the company such as the boosted income and increased assets. Simon could go to jail for what she has done and Im sure Hobbs the other partner (If thats how this arrangement works) would not be happy about Carol Simon commiting fraud to get a loan for the company.

Answer 2

I think she is doing that because she doesn't want the company to look as in need of the loan as they really in are in the year end financial statements. She wants the stockholders to have confidence in the company. No, her action is not ethical--she should not be making the income entry until the delivery/shipment of the furniture (i believe) and the adjusting entries should be made at the end of the year--not pushed later to make the books look better.

Answer 3

Ok...the reason she needed to add the furniture is because she need the profit to be lower so she doesn't need to pay extra if she went over her projection for the year 2000. the part about the holding of the checks and one bill is so she will lower the profit by having the payroll and A/P against the sales so everything will add up correctly nothing to high and nothing to low. i hope this helps