accounting question?

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

Simon's actions will make the 2000's net income better by $10,000 + $900 + $400 = $11,300

No, she is not being ethical and she's misleading the bank into thinking her business is better than it is. The bank may give her the loan thinking her business can generate enough to repay the loan.

Answer 2

if some accounts aren't material as in the cost or sale does not change significantly to the financial statements, then according to gaap, generally accepted accounting principles, that it's okay. but for simon to tell his store accountant to record a 10,000 sales of furniture to Simon family, is totally wrong. the accountant can be fined and be punished for writing fraud, and Simon could expect to be fired by his board of directors if his company is a publicly owned company. if Simon and Hobbs also provide financial statements, prepaid insurance will show up in their statements, and salaries owed to employees will also show up in the statememts. so in other words, if the company is owned by the public, then simon will be found right away of fraud. and no it's not ethical, you don't know why simon wanted those entries excluded, he can't do nothing to the financial statements, because it would give a bigger balance to the balance sheet, higher income for the income sheet, and depending on what his cash out flows were in 2000, he can have +/- cashflows. plus when investors get the 2000 financial statements, they would compare it with 1999, and there would be problem if there are no notes explaining why such debts weren't included.

the Sarbanes Oxley Act of 2002 will send Simon to jail.

the bank will find what Simon did with the report right away, they will ask for financial statements from previous years also. banks will not give out the loan if he can't provide documents from prior years. the statement of cashflows will give away the $11,300 discrepancies, where the cash flows will demonstrate that Simon and Hobbs was cooking the books.