Question

TEXT:

INSTRUCTIONS:

Refer to the Case Primer on the Student Website and in WileyPLUS to help you answer these cases. CA1-1 Sherry Chan has just started up a small corpo- ration that produces jewellery. She has applied for and received a government grant. The grant will automati- cally be renewed as long as the business shows a profit at year end. Because she is trying to control costs, Sherry will prepare the financial statements. The bank has loaned Sherry money and is also waiting for the year- end statements. It will decide whether to renew the loan or not.

INSTRUCTIONS TO THE TEXT^^

Answer 1

Ethical issues when preparing own financial statements :

As mentioned, sherry is preparing her financial statements on her own. These are the ethical issues that she might face when preparing her financial statements.

Understatement of Expenses :

It's is mentioned that grant will be renewed as long as the business in making profit. Therefore, sherry might understate her Expenses so that the profit might be higher.

Overstatement of Income :

She might provide for more income than actually received thereby overstatement of profit

Non Booking Expenses and Booking bogus income :

She might leave certain expenses and also might enter bogus income to show profits.

Overstatement of Closing stock :

By showing closing stock higher than the actual which will influence the profit..

Understatement of Opening Inventory :

Showing opening stock less than the actual that might show excess profit than what is actually earned.

Using the funds for personal purpose/Misappropriation of funds :

Sherry might use the grant for her personal purpose instead of using it for business purposes.

Also by not offering Depreciation for the fixed assets during the year the asset value will be high and the profit also will be higher than the actual.