Business

Why is Simon taking this action
Is her action ethical
Give your reason, identifying the parties helped and the parties harmed by Simons action.

The accounting practice of Carol Simon is unethical and he used the technique of big bath accounting by attempting to manipulate the sales and assets. By doing this practice, assets and sales are reported on the higher side while the liabilities are reported on the lower side. This fake projection of assets and liabilities helped the management to take loan from bank in the easiest way.

After reading the case thoroughly, one should assume that an ambiguity arises due to the sale of furniture because the management should cancelled the order once the bank granted a loan to the management. In any possible scenario, if no money is injected in the business of Simon and Hobbs or the furniture is not delivered by the year 2001 then no entry of sale is recorded in the year 2000. By artificial means, this move inflates the sales this is illegal accounting practice and most importantly it breaks the accounting standards and principles.

In addition, if Simon not recorded wages owed to employees then the liabilities of Simon is reported on the declining side. By doing this practice, the balance sheet of Simon looks attractive and impressive from the banks perspective. As per the accounting practices, prepaid insurance is reported on the assets side of the balance sheet. If Simon not recorded the prepaid insurance as expense this means that Simon deliberately increases its assets in order to make the balance sheet strong and attractive.

All in all, it is an unethical and illegal accounting practice. Moreover, in a short time period this illegal accounting practices benefits the management by receiving the bank loan at lower interest rate. But in the longer version this move distorts the image of the company.            

A DISCUSSION ON CASH VS. ACCRUAL ACCOUNTING, MATCHING PRINCIPLE AND REVENUE RECOGNITION PRINCIPLE.
Accrual Basis vs. Cash Basis Accounting

Recognition of revenues or expenses when earned or incurred, without regard to the actual timing of the cash transactions used in the accrual method of accounting or we can say in a manner that Method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid. While on the other hand, Cash basis accounting is a methodology in which revenues and expenses and all other transactions are recognized when cash changes hands, in contrast to the accrual method of accounting (Meigs, 1999).

Matching Principle
Under matching principle, expenses must be offset against the revenues earned in the period. Thus, expenses of the period are matched against the revenues of the same period, and the result is net income or loss for the period (Meigs, 1999).

Revenue Recognition Principal
Recognition of revenues or expenses when earned or incurred, without regards to the actual timing of the cash transactions is used in the accrual method of accounting, or it can be described as the method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid. Method of revenue recognition (Percentage Completion Method, Cost Recovery Method, Installment Sales Method etc) (Meigs, 1999).