Chick Falay

Joan Jett and Chick Falay were unusual friends. Chick came from a background of poverty while Joan had an extremely affluent family. Indeed, the two would never have known each other except for an unusual set of events. Joans parents had given her a new car for her 16th birthday. Not being used to the new vehicle, Joan misjudged a curve and wrecked the car. Chick happened to see the accident and helped Joan get out of the vehicle. Joan was unhurt but extremely distraught. She told Chick that her parents would never trust her again. When the police arrived, Chick told them that he had seen a child run in front of Joans car and that Joan had swerved off the road to save the childs life. Upon hearing the story, Joans parents considered her a hero. The insurance company paid for a new car and Chick had made a friend for life. Joan went to college and became a CPA in her fathers accounting firm. Chick worked for several restaurants and managed to start one of his own. The restaurant became successful and Chick turned the accounting work over to Joans firm. Having no formal business education, Chick had little technical knowledge of business practices. At the beginning of 2019, Chicks Balance Sheet included $10,000 Cash and Other Assets amounting to $380,000, liabilities consisting of a Note Payable and other items of $80,000, and Common Stock of $25,000. Joan provided Chick with accounting services for several years and was reasonably certain of the accuracy of these figures. Since Joan had always advised Chick on financial matters, Joan was also aware that during 2019, Chick had paid Cash to purchase $50,000 of Restaurant Equipment. Also during 2019, Chick had been able to repay $15,000 on the Note Payable that evidenced the restaurants liability to a Bank. Finally, Chick had received a $20,000 Cash Dividend from the Restaurant. Chick had made no additional Cash Contributions to the business during 2014. Even so, the records that Chick provided to Joan for 2019 indicated that the restaurant earned $200,000 in Cash Revenues and incurred $175,000 in Cash Expenses. The ending balance in the Cash account was $12,000. After analyzing the data, Joan became convinced that Chick was not reporting everything. She confronted Chick with her suspicions and Chick admitted that he was not reporting all of the Restaurants Sales Revenue. He justified his behavior by saying he didnt think the income tax system was fair and he did not want to pay any more taxes than he had to pay. Chick defended himself, Im only doing what everyone else does. Your dads biggest client, Buddy Bulbous, has been skimming a million a year off his chain of restaurants. I know because I used to work for him. Even so, you and your dad give him an Unqualified Audit Opinion every year. So why wont you do the same thing for me? Im supposed to be your friend and Buddy is a Dope. Chick became so indignant, he told Joan, Either you go along with me on this or Ill find a new accountant and a new friend. Ive always stood up for you and this is the thanks I get.

How much income is Chick not reporting? Show calculations.

How does Chicks failure to report Cash Revenue affect the Financial Statements? 1. Assets = Overstated or Understated? Why? 2. Liabilities = Overstated or Understated? Why? 3. Owners Equity = Overstated or Understated? Why? 4. Income = Overstated or Understated? Why?