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Effects of Simon & Hobbs' Accounting Changes

Details: The net income of Simon and Hobbs, a department store, decreased sharply during 2000. Carol Simon, owner of the store, anticipates the need for a bank loan in 2001. Late in 2000, Simon instructs the store's accountant to record a $10,000 sale of furniture to the Simon family, even though the goods will not be shipped from the manufacturer until January 2001. Simon also tells the accountant not to make the following December 31, 2000 adjusting entries:

Salaries owed to employees: $900
Prepaid insurance that has expired: $400

Why is Simon taking this action? Is her action ethical? Give your reason, identifying the parties helped and the parties harmed by Simon's action.

Objective: Analyze the effect of business transactions on the basic accounting equation.

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Solution Preview

Carol Simon is taking this action because she knows that the bank will look more favorably upon her company's financial position and will be more willing to give her a loan if the sale is recorded and the other transactions are not (of course, the bank will not be privy to the fact that the offenses have been committed, only the fact that the overall financials appear to be more healthy relative to the actual ...

Solution Summary

The solution shows how performing under-handed accounting will over or under state revenues or expenses.