The net income of Reliable Provision companydecreased sharply during 2003. Clay

Question

The net income of Reliable Provision companydecreased sharply during 2003. Clay Rollins, owner of the store,anticipates the need for a bank loan in 2004. Late in 2003, heinstructed the accountant to record a $70,000 sale of recreationalgear to the Smith family, even though the goods will not be shippedfrom the manufacturer until January 2004. Rollins told theaccountant not to make the following adjusting entries:

Salary owed to employees: $1,000

Expired prepaid insurance: $500

Is income overstated or understated? Why did Rollins take theseactions? Are they ethical? Give reasons for your answer. As afriend, what advice would you give the accountant?

Explanation / Answer

The effect of the owner’s proposals will result in thefollowing:

The owner took these actions to avail the bank loan.

The actions are not ethical.

They do not project a true picture of the business’sfinancial state of affairs.

As a result they are misleading.

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