Khaled company facing its first annual net loss as the end of the year approache
ID: 2499498 • Letter: K
Question
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.
Requirements:
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?
Explanation / Answer
1. This fraudulent action has two affects :
a) The income statement is overstated wrongly by 10000 revenue which in turn overstes the income for the year.
b) The year end balance sheet is not showing the bank loan which is a liability . Hence company's liability is understated by this amount
2)
This affects the creditors significantly as it is giving a wrong picture through its income statement and blance sheet.
By this action , the creditors will not be getting the correct picture of the financial condition of the company and may not press for their dues thinking that the company is in profits and has sufficient cash balance. This action may cause them to lose their dues as the company's financial position is not good and is displaying the wrong surrent ratio and quick asset ratio
This act puts the creditors at great risk.
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