Anderson Consulting is a design firm that prepares its financial statements usin
ID: 2512859 • Letter: A
Question
Anderson Consulting is a design firm that prepares its financial statements using a calendar year. Tia Kin, the company treasurer and vice president for finance, has prepared a classified balance sheet as of December 31. In January, this balance sheet will be submitted along with an application for a loan from Chase Home Bank. An excerpt from the balance sheet follows:
Cash $ 25,000
Accounts receivable 85,000
Total Assets $250,000
The accounts receivable balance includes a $56,000 loan to Jack Small, the company president. Jack borrowed the money from Anderson Consulting 24 months earlier for a down payment on a new home. Jack has orally assured Tia that he will pay off the loan within the next year. Because Jack is the company president, Tia treats the amount due as part of the normal accounts receivable. In addition, Tia knows that the bank will consider a large balance in accounts receivable more favorably than a large personal loan to a single individual. Tia reported $56,000 in the same manner on the preceding year's balance sheet.
1. Is Tia behaving ethically by reporting the loan to Jack as a trade account receivable? Why or why not?
2. Who will be affected by Tia's decision?
Explanation / Answer
1. Is Tia behaving ettically by reporting the loan to Jack as a trade account receivable? Why or Why not?
No, Tia is not behaving etically by reporting the loan to Jack as a trade receivable. It is misrepresentation of financial statement. They are misleading the financial position of the company by showing loans as a trade receivable. Trade receivable as the name suggest are receivable due from customers in the course of business, but here Tia changed the nature of loan to employee as trade receivable, which is misleading and ethically wrong.
2. Who will be affected by Tia's decision?
All the readers of the financial statement will be affected by Tia's decision. Bank that will provide loan based on financial position of the company will be affected.