Question

You must label each answer with the number of question. Each question must have at least three sentence answers. There is no maximum sentence, use as many as you wish to thoroughly answer the question. All answers must be complete sentences using proper grammar and spelling.

Sarah paid $50,000 for a franchise that covers the entire United States. She intended to sell individual franchises for the each state. Naturally, investors considering buying a franchise from her asked to see the financial statements of the business.

Believing the true value of the franchise to be $500,000. She gives the franchise to Cindy. She borrow $500,000 from the bank. She pays $500,000 to the corporation for all of the stock. The corporation then uses the $500,000 to buy the franchise from Cindy. Cindy then pays the bank loan off with the $500,000.

In the final analysis, Cindy is debt-free and out of the picture. Sarah owns all the corporation’s stock, and the corporation owns the franchise. The corporation’s balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is the most valuable marketing tool.

Requirements

1. Was this an ethical or unethical situation? Explain your reason.

2. Who can be harmed? Explain your reason.

3. How can they be harmed? Explain your reason.

4. What role does accounting play?

Answer 1

1. Ethics means doing the morally right thing. The situation mentioned above is an unethical situation. It involves a manipulative transaction to wrongly inflate the value of the stock and put an asset on the balance sheet to mislead investors.

2. Investors who will buy the stock state wise will be harmed. They will analyze the balance sheet to study the financial strength of the business. They will make their decision based on the deceitful figures about whether to buy the franchise or not.

3. Investors will be buying a stock whose core value is $50000 for a much higher price. The manipulative balance sheet prepared by including a devious transaction will be responsible for this. Investors will be stuck with a bad investment.

4. Accounting plays the role in the accounting of the value of the stock. Due to Sarah selling off the stock to Cindy at $500000 and then rebuying it at $500000, there is now a loan free stock of the value of $500000 on the balance sheet. That does not reflect the market value of the stock.