Question

Mr. Peter is a certified accountant working for ABC company. ABC Company borrows 5 million THB from a bank on a 5 years note. Mr. Peter reported 5 million THB as revenue in the income statement.

1. What is the ethical issue in this case?

2. What is the effect of recording the 5 million on financial reporting: (i) income statement, (ii) balance sheet, (iii) cashflows statement. ?

Answer 1

1)

Since the amount of 5 million THB has been borrowed from the bank therefore it is the liability of the bank to repay the amount in future.

Recording the amount as revenue will inflate the earning of the company and at the same time the total debt on the balance sheet will be lower than the actual. It is unethical to inflate the profit and to show lower the debt of the organization.

2)

i)

Recording the amount as revenue will inflate the earnings on the income statement.

ii)

It will reduce the amount of debt on the balance sheet than the actual.

iii)

Recording the amount as revenue will increase the cashflow from operating activities which should have been recorded as cashflow from financing activities.