Ethical Discussion: Balance Sheet Reflects Information
Ed Casey is the owner of Casey's Collectibles. The business uses the accrual method of accounting and recognizes sales revenue in the period in which the sales is make. AS a result, the Accounts Receivable balance at year -end was $92,480, which was net of the Allowance for Uncollectible Accounts of $1,260. Ed was completing the year-end financial statements for the business in order to apply for a much needed business loan when he saw a letter form a district court. The letter was to inform his a proprietor of Casey's Collectibles that Charlie Smith had declared bankruptcy. As it turned out, Charlie was Ed's largest customer and his account receivable balance was $34,295, which the bankruptcy notification letter state was never going to be paid. When Ed looked over the account receivable aging schedule and saw that Charlie's account was more than 90 days past due, and even though Ed had been suspicious, he still hoped that Charlie would pay his account balance. Ed looked at this balance sheet and thought that if he wrote off Charlie;s account, the bank would become concerned about all of the accounts receivable listed. He then thought that head he not been so quick to open the mail, he would not have know that Charlie was bankrupt, and the balance sheet he was about to present to the bank would be fine. Knowing how potentially damaging this new information could be, Ed decided to just ignore it for the moment and siply go ahead with the balance sheet he ad originally planned to give to the bank.
Instructions
Answer the following questions:
1. Should Ed provide the bank with a new balance sheet that reflects this new information?
2. Would Ed have been fine with the original balance sheet had he simply waited to open his mail?
3. Are any ethical issues involved with updating financial statement information for subsequent events?
4. Did Ed not properly use the allowance method as he only had a lance for doubtful accounts totaling $1,260?
5. Would Ed need to inform the bank had the bankruptcy letter been from a customer with an account receivable balance of $120?
Ethical Discussion
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Ethical Discussion
1 Should Ed provide the bank with a new balance sheet that reflects this new information?
The purpose of a balance sheet is to show the financial position of a company to guide in the decision-making process. Therefore, it is important for Ed to provide the bank with an updated balance sheet so that it can have a true image of the company's financial position. It is the financial statements that guide banks in awarding companies with loans, therefore, if the bank awards company a loan based on the misleading financial statements, it may default because it may not have the resources to settle it. Providing an accurate information will enable the bank to award them with the amount, which they will be able to repay.
2 Would Ed have been fine with the original balance sheet had he simply waited to open his mail?
Ed learned of the uncollectible debts after opening the mail. Could have he waited to open it; still, they could have suffered the same consequences of providing the misleading financial statements. Additionally, he could have been accused of not performing his duties as required because the debt was 90 days past due. Therefore, Ed could not have been fine at all.
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