Explore BrainMass

Explore BrainMass

    Ethical Accounting

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    I am reviewing information about the preparation of a finanacial portfolio for the purpose of obtaining a loan from a financial institution. Could you provide some insight on this topic?

    Problem (also attached):
    John Warren wants to borrow $100,000 to expand his restaurant business. John is preparing a set of financial statements to take to the local bank with his loan application. John currently has an outstanding loan from his father for $50,000. John's father is allowing him to borrow the money at a very low interest rate, and he does not have to make any principal payments for 5 years. Due to the favorable terms of his loan with his father, John has decided that it is not significant to disclose this loan on his financial statements. Instead, John has classified the $50,000 as contributed capital (equity), and the interest payments are included in miscellaneous expenses on the company's income statement.

    1. What are the effects of John's classification on the financial statement?
    2. Are there any ratios that might be of concern to the local bank that will be misstated by John's actions?
    3. Are John's actions unethical?
    4. Suppose John's father agrees to be a partner in the company and John can afford to buy his shares by repaying the $50,000 with interest. Does that change your opinion of John's actions?

    © BrainMass Inc. brainmass.com June 3, 2020, 5:54 pm ad1c9bdddf
    https://brainmass.com/business/business-ethics/ethical-accounting-41459

    Attachments

    Solution Preview

    John Warren wants to borrow $100,000 to expand his restaurant business. John is preparing a set of financial statements to take to the local bank with his loan application. John currently has an outstanding loan from his father for $50,000. John's father is allowing him to borrow the money at a very low interest rate, and he does not have to make any principal payments for 5 years. Due to the favorable terms of his loan with his father, John has decided that it is not significant to disclose this loan on his financial statements. Instead, John has classified the $50,000 as contributed capital (equity), and the interest payments are included in miscellaneous expenses on the company's income statement.

    1. What are the effects of John's classification ...

    Solution Summary

    This explains the impact of ethics on Accounting by taking various cases

    $2.19

    ADVERTISEMENT