Accounting and the economic impact they can have on

Info icon This preview shows pages 23–25. Sign up to view the full content.

View Full Document Right Arrow Icon
accounting and the economic impact they can have on balance sheets and income statements. When used improperly, adjust- ments distort financial reports and can mislead investors and other financial statement users. (Source: "Corporate Scandal Sheet," Forbes 2002.) Improperly booked $100 million in annual construction cost overruns before customers agreed to pay for them. Improperly recorded $11 billion of operating expenses as capital costs (assets). Halliburton (HAL) Halliburton recognized revenues before earned. Its accounting entry increased accounts receivable and revenue, thereby inflating net income. It later wrote off the receivables when customers refused to pay. WorldCom recorded costs as assets on the balance sheet rather than as expenses in the income statement. This inflated both assets and income. It later wrote off the assets (and reduced income) when the transactions were uncovered. WorldCom (WCOEQ) Overstated net income by $1.5 billion over five years. Xerox (XRX) Customers purchased copiers and service contracts as one purchase. Xerox allocated most of the "sale" to hardware, thereby recognizing revenues before they were earned under service contracts. Despite their (generally) beneficial effects, adjustments can be misused. Managers can use adjustments to bias reported income, rendering it higher or lower than it really is. Adjustments, if
Image of page 23

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
PPRNT 3,000 Cash 3,000 Module 2 I Overview of Business Activities and Financial Statements 2-24 'Jltl:iiL:!:;;OO, can adversely affect business and investment decisions. Many recent accounting scan- ve resulted from improper use of adjustments. Although outsiders cannot directly observe ..:::.::i~:rni·es' specific accounting entries, their impact can be detected as changes in balance sheet me statement accounts. Those changes provide signals for financial statement analysis . .•.••.• zsequently, understanding the accrual process will help us know what to look for as we analyze ..::::::E:;;:.:rni' es' financial reports. re are four types of adjustments, which are illustrated in the following graphic. The two ents on the left relate to the receipt or payment of cash before revenue or expense is rec- ..•••• zzed, The two on the right relate to the receipt or payment of cash after revenue or expense ::::;-;:~~. ed. Cash is paid or received r before expenses or :-1 revenues are recognized + Cash is paid or received r after expenses or :-1 + revenues are recognized + .- I Accrued Revenue Prepaid Expense Unearned Revenues Accrued Expenses - two types of accounts arises when cash is received or paid before recognition of revenue nse. epaid expenses Prepaid expenses reflect advance cash payments that will ultimately become expenses; an example is the payment of radio advertising that will not be aired until sometime in the future.
Image of page 24
Image of page 25
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern