Manipulated Financial Statements - Case Study Example

Manipulated Financial ments al Affiliation) Introduction There are various standard procedures that are usually applied to guide accounting processes in the current business environment. These standard procedures are applicable to most global businesses in regard to their sizes and specific modes of operation. One of the procedures applied to guide accounting processes is the application of the Generally Accepted Accounting Principles; this is a concept of application of a common set of procedures and rules by Companies to guide the process of compiling their financial statements. They are also universal principles that applicable to most global companies (http://www.principlesofaccounting.com/chapter23/chapter23.html n.d). Discussion In difficult economic times, companies are usually compelled to manipulate their inventories in order to ensure that they achieve profitable incomes from their Markets. In this regard, the inventories of various companies are usually subjected to such manipulation while other companies may shift their focus towards boosting certain facets of their inventories with an intention to improve their performance with regard to their profits. In addition, companies may manipulate their inventories and find ways to increase the purchasing power of their clients through a process referred as trade loading or even client stuffing. Accounting Concepts in Absorption Costing for External Financial Reporting According to the requirements of the Generally Accepted Accounting Principles, the application of absorption costing is imperative when compiling external financial report in any company. The Concept that guides absorption costing in the case involves a scenario whereby the normal associated manufacturing costs are regarded as product costs and included in the reporting inventories (http://www.principlesofaccounting.com/chapter23/chapter23.html n.d). The process of sales goes on; the inventories costs are transferred to the cost of goods that have been sold. This entails that the gross profit are reduced by entire costs of manufacturing. This is regardless of whether the costs are related to the direct labor, direct materials and fixed manufacturing over-head as well as costs of variable manufacturing overhead. The costs of sales, general as well as administrative are usually categorized as period expense. The rationale applicable in the process of absorption costing is that it creates a scenario where a product or a service is measured and a report is compiled indicating that it is a complete cost. Some costs like fixed manufacturing over-head are quite challenging to identify, however, they are usually considered as the costs of a certain output by allocating them to certain the specific products that have been generated. (http://www.principlesofaccounting.com/chapter23/chapter23.html n.d) The corpus of absorption costing in as much as it may be perfect, in some cases it may be subjected to certain deficiencies majorly due to that fact that it is related to decision making processes. Moreover, this concept may not provide the best signs with regard to the process of pricing certain goods or products. Consequently, it may not be appropriate for providing ideas applicable to the provision of discounts on goods and products. Concept of Phantom The corpus of Phantom or Illusory profits entails a difference in two issues; to begin with, it is the difference between the profits that have been reported by application of the United States Generally Accepted Accounting Principles and the profits that have been computed by replacing costs. The existence of illusory profits are usually experienced majorly when a company experienced rising costs with significant amounts of plant assets as well as inventory costs (Baer & Simonsen 1965). An example of a situation of an illusory profit is may be evident when inventory is evaluated or measured by application of the first ins and the first out cost flow guided by the United States Generally Accepted Accounting Principles. In this case, the actual historical costs associated with inventories charged to the costs of goods that were sold within a period of rising cost is generally lower than the amount of costs that were computed for through the use of Replacement costing. In this regard, the lower amounts of costs charged to the income financial statements entails that there is a higher profit. The difference occurring in this case is what is referred as illusory profits. Profits below the Break-even Point According to the concepts of cost accounting, the essence of break-even point entails a scenario where; revenues, costs and expenses are equal. That is, there is no net loss or even net gain, a scenario that is usually referred as ‘broken even’. However, opportunity costs in this case are usually paid (http://www.accountingcoach.com n.d). Businesses operating below the break-even point can sell their products and make profits as compared to businesses that operate above the break-even point. This is undertaken by applying the concept of First ins and First outs where; an assumption is made that the assets remaining within the inventory of the company are matched with assets that have been recently produced or purchased followed by strategies that involve minimization of associated costs i.e. taxes et cetera. Case Study Manipulation of Financial Statements by WorldCom Company In January 9th, 2014, the WorldCom was among the companies that were recorded to have manipulated their financial statements in order to create a positive image in the society by deceiving their clients that they were successful. Throughout my research and analysis, I learnt that the United States Securities Exchange was responsible for bringing this issue into limelight after undertaking a careful financial analysis. From this information, I managed to learn that the Company applied a deceptive concept of reporting their financial statements among the public: This was performed by inflating the profits of the Company to an amount adding up to 4 billion dollars. Outcome of the Deceptive Accounting Undertaken by WorldCom To begin with, WorldCom is among the companies that created a loss of an average of 153 billion dollars. The Company, led to a loss of approximately 17000 jobs majorly due to lack of transparent accounting. Moreover, the Company experienced a negative public image especially among its stakeholders and shareholders. The efforts of the company to manipulate its financial statement were a great violation of the US Generally Accepted Accounting Principles; hence had the company exposed to certain punitive actions for violation of these principles. Annotated Bibliography 1. Baer, W., & Simonsen, M. H. (1965). Profit illusion and policy-making in an inflationary economy,. Oxford: Oxford Economic Papers. This is a book that was written by Werner Baer and Simnonsen Mario in 1965. It is an old book, but with imperative information regarding Profit Illusion or the Concept of Phantom accounting. The book begins by describing inflation as a major factor that has compelled many companies to consider the concept of phantom or illusionary profits. This book is important to this research as it provides a comprehensive description and discussion regarding illusionary profits. Moreover, it describes various issues regarding the corpus of phantom profit at firm’s level. Therefore, this book is imperative in the sense that it provides information that can improve the writer’s understanding of illusionary profits. 2. Break-even Point (Explanation). (n.d.). AccountingCoach.com. Retrieved March 25, 2014, from http://www.accountingcoach.com/break-even-point/explanation This is a website source, specifically from the accounting coac.com website. It focuses on a discussion geared towards creating an understanding of the break-even point. It begins by explaining the meaning of this business concept and how it applies in real business environment. In regard to this research, it is an important source of information owing to the fact that it enables the writer to comprehend the concept of break-even point in a business environment. 3. Financial Statements Manipulation: The Cause of Corporate Failure. (n.d.). Daily Guide. Retrieved March 25, 2014, from http://www.dailyguideghana.com/financial-statements-manipulation-the-cause-of-corporate-failure/ This is source was derived from the Daily Guide Website. It provides pertinent information with regard to Co-operate Financial Statement Information. Specifically, it focuses on a discussion of the failures of major Companies in the United States that performed manipulation of their financial statements in order to create a positive image among stakeholders but, late experienced greater financial losses. It gives data regarding the statistics of finances there were quoted as the profits made by the companies, which were not accurate. It is an important source of information for this research as it facilitates the fulfillments of the requirements of question three. The writer extracted information with regard to a case-study by WorldCom that manipulated its financial statements, but later suffered associated consequences. 4. Principles of Accounting. (n.d.). Principles of Accounting. Retrieved March 25, 2014, from http://www.principlesofaccounting.com/chapter23/chapter23.html This is a website published by the Principles of Accounting.com. The website provides information ascribed to the principles of accounting in the contemporary society. With regard to this research, the website provided data ascribed to the concept of absorption costing for external financial statement recordings. It gives a vivid discussion regarding this issue as well as examples that can be applied by the writer to understand this topic effectively. Read More