Ahmed was accounting manager at ABC co and he is a cousin of Adel, the CEO of ABC co. The CEO stood to earn a substantial bonus if ABC increased net income by year-end. Ahmed, the accounting manager, boasted to Adel, the CEO, that he knew some accounting tricks that could increase company income by revising a few journal entries for rental payments on production units.
At the end of the year, Ahmed changed the debits from ‘rent expenses’ to ‘prepaid rent’ on several entries. As a result, Adel got his bonus and the deviations were never discovered.
1-How did the change in the journal entries affect the net income of the company at year-end?
2-Who gained and who lost as a result of these actions?
Your family would like to start a trading company in your country and hire you as accounting profession to make some important decisions such as using cash or accrual basis accounting, how often will financial statements be prepared, when will the business records it revenues and expenses.
Write a report to address the above considerations and give complete explanation of your reasoning?
Salem would like to expand his business and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.5.
The expansion costs have brought the current ratio to 1.4 on Dec. 15. To avoid this decrease in current ratio Salem record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been sign.
1-Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio.
2-Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation, and give the reasons underlying your conclusion.
Khaled company facing its first annual net loss as the end of the year approached and he is under the pressure from the company’s creditors to report positive net income for the year. He told the controller to record the $ 10,000 incoming bank loan as a revenue instead of a loan. That would nudge the company’s income into positive territory for the year, and then, he said, the entry could be corrected in January when the loan was repaid.
1-How this action affect the year-end income statement? How would it affect the year-end balance sheet?
2-If you were one of the company’s creditors, how would this fraudulent action affect you?