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

Question:

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 a trade account receivable. In addition, Manny knows that the bank will consider a large balance in trade 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.

1. Is Manny behaving ethically by reporting the loan to Tom as a trade account receivable? Why?
2. Who will be affected by Manny’s decision?

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