The adjusting process and ethical issues in financial reporting

Steinbach & Sons Accounting

Steinbach & Sons Case

Accounting Implications

The adjusting process that this case alludes to occurs both on the income statements as well as the balance sheet. The adjustment that will affect the income statement is:

$2,000 dollar sales of furniture to family members

Added to the gross revenues ( + $2,000)

The adjustments that will affect the balance sheet are:

$900 Wages owed to employees

This would be added to the short-term liabilities account ( + $900)

$400 Prepaid Insurance that Expired

This would be debited for the asset account ( - $400)

The additional revenue can be added to the profit and loss statement and be added to the gross revenue figure. The nine hundred dollars owed to employees will increase the liabilities account if properly adjusted. The prepaid insurance would count as an asset if not adjusted, however since it has expired if it was properly adjusted then it should be removed as short-term asset.

Ethical Implications

The owner of Steinbach & Sons is undoubtedly trying to make their financial statements look better or basically pad them so that they will be in a better position to obtain financing from a lending institution. Not only is this immoral, but it is quite reasonably illegal. It is unethical because they are purposefully trying to misrepresent their real financial situation which can be considered a form of fraud and potentially subject to prosecution. The economic implications to the lending institution can be thought of in terms of asymmetric information, which would increase and thus put the bank at an increased level of risk.