Question

In: Accounting

Ken Jones wants to start a small business and has asked his uncle to lend him...

Ken Jones wants to start a small business and has asked his uncle to lend him $10,000. He has prepared a business plan and some financial statements that indicate the business could be very profitable. Ken is afraid his uncle will want some ownership in the company for his investment, but Ken does not want to share what he believes will be a hugely successful company.  

1. What are the ethical issues Ken must face as he prepares to present his business plan to his uncle?

2. Do you think he should try to emphasize the risk of ownership to his uncle to convince him it would be preferable to be a creditor? Why or why not?

Solutions

Expert Solution

1. What are the ethical issues Ken must face as he prepares to present his business plan to his uncle?

Ans

If Ken is not interested in giving equity in the new business. He should inform his uncle that he wants a loan of $10,000 for his business and will repay it with interest and should provide true and fair financial statements.

The financial statements should show the amount lent by uncle as loan and provide true and fair statements as under

  •          Projected profit and loss statement for next 5 years
  •          Projected balance sheet for next 5 years
  •          Projected statement of cash flow statements

As per his initial projections should reflect correct profitability of the business . if uncle proposes investment in his company he should be upfront in not sharing his control of his business

2. Do you think he should try to emphasize the risk of ownership to his uncle to convince him it would be preferable to be a creditor? Why or why not?

Ans

If ken uncle wants ownership in the company against $l0,000 he wants to invest than

Ken should explain the advantages and disadvantages in being the owner of the company and the potentials risks and rewards attributed to the equity holder/owner of the business

Ken should also explain the risks involved for loan given to company as a creditor if the business fails

Being ethical and honest will help Ken in long- term for his business as trust with all stakeholders both internal and external plays a important part in growth of the business

ekkarill92 answered 1 year ago
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