New Wave Images is a graphics design firm that prepares its financial statements using a calendar…

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New Wave Images is a graphics design firm that prepares its financial statements using

a calendar year. Manny Kinn, the company treasurer and vice president of finance, has

prepared a classified balance sheet as of December 31. In January, this balance sheet will

be submitted along with an application for a loan from First Peoples Community Bank.

An excerpt from the balance sheet follows:

Cash $ 25,000

Accounts receivable 85,000

Total assets $250,000

The accounts receivable balance includes a $56,000 loan to Tom Morrow, the company

president. Tom borrowed the money from New Wave 18 months earlier for a down payment on a

new home. Tom has orally assured Manny that he will pay off the loan within

the next year. Because Tom is the company president, Manny treats the amount due as

part of its normal accounts receivable. In addition, Manny knows that the bank will consider a large

balance in accounts receivable more favorably than a large personal loan to

a single individual. Manny reported the $56,000 in the same manner on the preceding

year’s balance sheet.

Required:

a. Is Manny behaving ethically by reporting the loan to Tom as a trade account

receivable? Why or why not?

b. Who will be affected by Manny’s decision?

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