Simon is undertaking what is commonly termed as “window dressing”. He is recording and omitting important transactions so that the financial health of the organization would appear better when the loan is requested. For example, the inclusion of $10,000 sales revenue to the Simon Family would increase the net income of the organization by that amount and would thus portray a better profitability level. The omission of salaries payable of $900 and expired prepaid insurance of $400 would also indicate a better liquidity of the firm as outlined in the Balance Sheet.
Ethical Matters The actions noted above can be classified as manipulation of accounting figures. Such actions are highly unethical, because they are infringing an important principle present in the code of ethics. This principle encompasses that of integrity, which means that the entrepreneur should be honest in the information provided to external users. Indeed, the accountant should desist from recording and omitting such transactions in line of such ethical matters.
Effect of Simon’s Actions If these false figures are adopted and manipulated accounts are forwarded to the bank, this will help the entrepreneurs of this business because they will attain the loan. However, such action would be extremely harmful to the bank, because the bank investment would be highly risky. This is due to the fact that in reality the profitability of the department store has fallen drastically and it is not as rosy as it is portrayed.
Therefore there is a high risk that the business of Simon and Hobbs would not perish and end up in bankruptcy. If this is the case the bank would not be paid back the loan plus interest leading to a loss on such matter.
About. com (1999). Understanding Financial Statements. Available from: http://stocks. about. com/gi/dynamic/offsite. htm? site=http://bizzer. com/images/Financial/ (Accessed 30th April 2009).