Cash Versus Accrual Accounting Suppose that Tina’s Frame Shop is anticipating applying for a bank

Cash Versus Accrual Accounting

Suppose that Tina’s Frame Shop is anticipating applying for a bank loan in the near future. Although Tina’s has been using accrual accounting, the bookkeeper suggests that the firm switch to a cash basis in order to improve its financial picture.

Required

a. Assuming that the bank requires financial statements on a cash basis, what actions could the bookkeeper and the firm take to report more favorable results under the cash basis?

b. How might the bank react when it compares any of Tina’s earlier statements under the accrual method with statements that are much more favorable under the cash basis?

c. Is Tina’s auditor obligated to provide both sets of statements to the bank and explain any differences? Why?

d. Now assume that the bank permits either cash or accrual accounting. Is it ethical for Tina’s to try to “fool�the bank with statements prepared using the most favorable accounting procedures? Why?

e. If you were Tina’s bookkeeper, would you expect to be fired if you gave the bank both sets of financial statements? How would this possibility change your views?

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