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Different researchers have dissimilar views regarding financial accounting theories (McGraw-Hill, 2006). There are different types of accounting theories that can be implemented in real life scenario. One of them is the Repo 105 theory. This theory is used by many of the companies. Moreover, it needs to be mentioned that the misuse of such theories can result in negative functioning of the companies. There are many such cases where improper use of accounting theories result in complete demise of the companies. Financial regulations can play a major role in reducing such cases (Liu & Schaefer, 2011; Eisinger, 2012).
The report intends to discuss the role of Repo 105 scheme in the enhanced performance and subsequent downfall of the Lehman Brothers. The report would further depict the different motives that encourage companies to manipulate their financial accounts with reference to a few well known cases. Moreover, the report also intends to illustrate the importance of financial regulations in reducing such cases.
Repo 105 is an accounting trick where a company depicts a short-term loan as a part of the sales of the company. Moreover, this loan would be further used by the company to repay its liabilities. A repo agreement would include temporary transfer of assets from one party to another which would also be accompanied by an agreement of repurchase of the same assets after a particular phase of time. After a certain period of time, the transferee returns the securities to the borrowers, which in turn repays the loan with a considerable interest. It needs to be mentioned that as a part of the exchange process, one party would receive securities as guarantee for the cash loaned, while the other party would receive cash guarantee for the securities loaned. It has been observed that these agreements are widely used as well as recognised as a legal means of
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