Cash Versus Accrual Accounting
Suppose that Tinaâ€™s Frame Shop is anticipating applying for a bank loan in the near future. Although Tinaâ€™s has been using accrual accounting, the bookkeeper suggests that the firm switch to a cash basis in order to improve its financial picture.
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 Tinaâ€™s earlier statements under the accrual method with statements that are much more favorable under the cash basis?
c. Is Tinaâ€™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 Tinaâ€™s to try to â€œfoolâ€�the bank with statements prepared using the most favorable accounting procedures? Why?
e. If you were Tinaâ€™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?