Question

Case Study (Graded Assignment):

You are the assistant to a loan officer for a bank. You recommended the approval of loans based on the financial standing of an individual or a business. One of your current customers is Linda Wynn, the owner of a travel service that has just completed its first year of operation and is now asking for a loan of $10,000. The only financial information received is an unadjusted trial balance. Linda tells you this report demonstrates that she is in good financial standing and should be granted the loan without any additional information.

Directions:

Explain to Linda why financial statements are needed and that they are more useful than an unadjusted trial balance and why it is improper for you to recommend approval of a loan based only on what she has provided. Your explanation should be written in a paragraph or two with the inclusion of an appropriate accounting principle.

Answer 1

In this question The unadjusted trial balance does not include adjusting entries. Adjusting entries include the accrual of revenues that were earned but were not yet recorded, and the accrual of expenses that were incurred but were not yet recorded.

Accrued expenses and the related liabilities often involve wages, utilities, repairs and maintenance, commissions, interest, and more.

Adjusting entries also include depreciation and the deferral of or an adjustment of prepayments including prepaid insurance, unearned revenues, customer deposits, and more.

The unadjusted trial balance does not include the complete financial Information as it does not contain the information with respect to accruals which is one of the fundamental accounting principle in preparation of financial statements.

Hence, it will be improper to use the financial information based on unadjusted trial balance.