Question

The net income of Steinbach & Sons, a landscaping company, decreased sharply during 2016. Mort Steinbach, owner and manager of the company, anticipates the need for a bank loan in 2017. Late in 2016 Steinback instructs the company's accountant to record $20,000 service revenue for landscape services for the Steinbach family, even though the services will not performed until January 2017. Steinbach also tells the accountant not to make the following December 31, 2016 adjusting entries:

Answer 1

The scenario involves unethical accounting by prematurely recognizing revenue and omitting adjusting entries to inflate a company's financial statements to secure a bank loan.

Step-by-step explanation:

The student's question involves ethical and accounting practices within a business context, relating to financial statements and loan acquisition. The scenario describes Mort Steinbach instructing the company's accountant to record $20,000 service revenue in advance and not to adjust entries that are typically made at the end of the accounting period. Recording revenue for services not yet performed will artificially inflate the company's income on the balance sheet, potentially misleading the bank when assessing a loan application. Furthermore, this practice violates the accrual accounting principles, which requires that revenue be recognized when earned, not when cash is received. Not making the adjusting entries will lead to inaccurate financial statements, affecting the balance sheet and the income statement. Such actions are unethical and can be considered fraudulent, as they intend to misrepresent the financial health of the business to obtain financial benefits in the form of a bank loan.