Problem:
The net income of Reliable Provision Company decreased sharply during 2007. Clay Rollins, owner of the store, anticipates the need for a bank loan in 2008. Late in 2007, he instructed the accountant to record a $70,000 sale of recreational gear to the Smith family, even though the goods will not be shipped from the manufacturer until January 2008. Rollins told the accountant not to make the following adjusting entries:
Salary owed to employees: $1,000
Expired prepaid insurance: $500
Is income overstated or understated? Why did Rollins take these actions? Are they ethical? Give reasons for your answer. As a friend, what advice would you give the accountant?