Question

Question #2 George Costanza, an old friend of yours from high school, started a small business about a year ago, which is organized as a private corporation. George is currently in the process of applying for a bank loan to expand his business. He shows you the most recent statement of financial position that he has prepared for the bank, which is as follows: COSTANZA CORPORATION Statement of Financial Position September 30, 2018 Assets Cash Accounts receivable Equipment $80,000 22,000 160,000 $262,000 Total assets Accounts payable Shareholders' equity $27,000 235000 $262,000 Total liabilities and shareholders equity Since George knows that you are studying accounting at the U of R, he asks your opinion. "What do you think?" he says. "Do you think the bank will be impressed and lend me the 100,000 I'm asking for?" You study the statement for a few minutes. You are pretty sure George doesn't have anywhere near $160,000 worth of equipment belonging to the business, so you ask where all this equipment is. "Well," explains George, "in order to increase my assets, I included my personal vehicle, computer and camera equipment, and some of my furniture. Theyre worth about $90,000. That should be OK, since these assets belong to me even though they don't belong to the company." On further questioning, George admits that he added his personal savings account of $45,000 in with the company cash to "make it look better." Instructions (a) Who are the stakeholders (users) here? Name two. (b) Is George's "creative accounting" ethical? Why or why not? (c) What would you recommend be done here? (Note: Bonus marks can be earned here)

Answer 1

Question #2:

a) Here, the stakeholders/users are Banker, consultants and Creditors. The Financial Position statement has been used by users to know their recovery, profitability and stability of company.

b) The George’s “creative accounting” is not ethically correct because he mixes the company assets with his personal assets to create the company’s capital. He has done this to make the Statement impressive for bankers to get loan of $100000. The position presented by him in the statement is not actual but fictitious one.

c) George should separate the company and personal assets and prepare a fresh company’s financial position correctly. He could have procedures to transfer his assets to the company as capital contribution by promoters. After preparing the Statements, he should get it authenticated through certified Accountant.