Questions to answer: 1. Is Manny behaving ethically by reporting the loan to Tom as a trade account receivable? Why? 2. Who will be affected by Manny's decision?
Questions to answer: 1. Is Manny behaving ethically by reporting the loan to Tom as a trade account receivable? Why? 2. Who will be affected by Manny's decision?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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### Case Study: Ethical Financial Reporting in New Wave Images
**Overview:**
New Wave Images is a graphics design firm that prepares its financial statements using a calendar year. Manny Kinn, the company treasurer and vice president of 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 First Peoples Community Bank.
**Excerpt from the Balance Sheet:**
| Category | Amount |
|------------------------|-------------|
| Cash | $25,000 |
| Accounts Receivable | $85,000 |
| ... | |
| **Total Assets** | **$250,000**|
**Analysis:**
The accounts receivable balance includes a $56,000 loan to Tom Morrow, the company president. Tom borrowed the money from New Wave 18 months earlier for a down payment on a new home. Tom has orally assured Manny that he will pay off the loan within the next year. Because Tom is the company president, Manny treats the amount due as a trade account receivable. In addition, Manny knows that the bank will consider a large balance in trade accounts receivable more favorably than a large personal loan to a single individual. Manny reported the $56,000 in the same manner on the preceding year’s balance sheet.
**Questions to Consider:**
1. Is Manny behaving ethically by reporting the loan to Tom as a trade account receivable? Why?
2. Who will be affected by Manny’s decision?
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