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Jared Jones has started a screen printing business. Because he is a private company he has chosen not to use accrual based on accounting. In January $2024$ he decides to go to the bank and ask for a loan to finance the purchase of a large piece of machinery. He is able to show the bank net income of $$75,000$ for the year ending December $31,2023.$ However, based on his income and debt to asset ratio, the bank is denies him the loan.

Jared goes back to the office and instructs his accountant to re$-$do the financial statements using accrual basis accounting. The accountant adds an additional $$40,000$ of revenue for a job that was performed at the end of December $2023$ and for which Jared was expected to be paid in January $2024.$ He also includes $$40,000$ on the balance sheet for accounts receivable, and $$2,500$ in accrued expenses. With this new information, the bank approves Jared for a loan.

Explain how the accrual basis changed Jared's A$.$ income and B$.$ debt to asset ratio.

Was it ethical for Jared to holude the $$40,000$ in his net income? Why or why not?

Module $3$ Discussion