Question

Glenn's Cleaning Services Company is experiencing cash flow problems and needs a loan. Glenn has a friend who is willing to lend him the money he needs provided she can be convinced that he will be able to repay the debt. Glenn has assured his friend that his business is viable, but his friend has asked to see the company's financial statements. Glenn's accountant produced the following financial statements: Income Statement Balance Sheet Service Revenue Operating Expenses 0000 Liabilites $85,000 35,000 $ 38,000 Net Loss S32,000Stockholders' Equity Common Stock Retained Eamings 82,000 32,000 Total Liabilities and Stockholders' Equity $85,000 Glenn made the following adjustments to these statements before showing them to his friend. He recorded $82,000 of revenue on account from Barrymore Manufacturing Company for a contract to clean its headquarters office building that was still being negotiated for the next month. Barrymore had scheduled a meeting to sign a contract the following week, so Glenn was sure that he would get the job. Barrymore was a reputable company, and Glenn was confident that he could ultimately collect the $82,000. Also, he subtracted $30,000 of accrued salaries expense and the corresponding liability. He reasoned that since he had not paid the employees, he had not incurred any expense. Required 1. Reconstruct the income statement and balance sheet as they would appear after Glenn's adjustments. Comment on the accuracy of the adjusted financial statements.

Answer 1

1. a) Increase the Sales as well as increase the Asset ( Accounts receivable or Cash ) in this case cash as Glenn was confident that he could ultimately collect the $82,000

b) Reduce Operating Expenses as well as liability

c) Now new calculated Profit will be transferred to retained earnings

Below are the new Statements

Income Statement	Actual	Modification	Modified
Service Revenue	38000	82000	120000
Operating Expenses	-70000	30000	-40000
Net Loss/Profit	-32000	112000	80000

Balance Sheet		Actual	Modification	Modified
Assets		85000	82000	167000
Liabilities		35000	-30000	5000
Stockhilders Equity
	Common Stock	82000		82000
	Retained Earnings	-32000	112000	80000
Total Liabilities & Stockholders' equity		85000	82000	167000

2 ) No I would not make the changes in the finnacial statements to get the loan as it will be treated as fraud and unethical to manipulate your Data

3) Elements of fraud triangle are of three types -

a incentive ( Not applicable in this case )

b opportunity - Glenn might take this as the last opportunity to save his company as he might think that his Original financials statements will not be verified by the lenders

c rationalization - In this case Glenn has made his mind to change the statement and rationalizing by convincing himself that since he had not paid the employees, he had not incurred any expense though he know the accrual principal - Glenn might have made his mind to do this thinking that he is not doing any crime as he is doing this just to borrow money and repay it where there be no loss to anyone

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