17) For each of the following situations discuss whether the accounting treatment is proper and, if not proper, what accounting principle is violated. Discuss the ethical and financial statement implications of each of the improper treatments.
A. A service company records revenue when cash is collected in advance of performing the service.
B. The owner used the cash received from a company bank loan to buy a car for his own personal use. The car was recorded as a company asset.
C. A company records revenue when earned even when the cash has not yet been received.
D. Land purchased ten years ago for $20,000 is reported on the balance sheet at its current value of $30,000. The company follows U.S. GAAP in preparing financial statements.
E. Inventory purchased last month and sold this month was deducted as an expense on this month’s income statement.
18) Vestige, Inc. needs another loan from a bank in order to pay its bills. In order to improve its chances of getting another loan, it reports its ten-month note payable as a long-term liability. Discuss the treatment of this note payable including the financial statement presentation and the effect on the current ratio. Discuss the ethical issue with Vestige’s treatment of this note payable.
19) Name one type of preventive control that would be useful in a computerized information system.
20) Name one type of detective control that would be useful in a computerized information system.
21) On July 1, the bank said it may lend money to Funny Books, Inc., but only after it prepares an income statement for the month of July. Since the bank did not specify, Funny Books, Inc. did not follow generally accepted accounting principles (GAAP). It reported net income of $12,000 for the month ended July 31. The revenue included $4,000 of cash collected in advance from customers for services to be performed in August. The revenue also included a $3,000 increase in the value of its land. The expenses excluded $2,000 Funny Books owed for July services it received.
Part A:
List the GAAP that were violated by Funny Books, Inc. and explain what the proper accounting treatment would be.
Part B:
Net income in accordance with GAAP should have been $________.
Part C:
Do you think the management of Funny Books, Inc. was acting unethically?
Why or why not?