Can you google the article and give an answer that has not been posted previousl
ID: 2574540 • Letter: C
Question
Can you google the article and give an answer that has not been posted previously.
Accrual accounting matches revenue with expenses, however accruals can be used to manipulate income and expenses. In the Forbes Magazine article, “Cash Doesn’t Lie,” written by Daniel Fisher, the author discusses the use of negative accruals, changes to estimates and recognizing income before it is earned. Read the article and then:
a. Discuss the use of each of these three techniques and their effect on current and future earnings reporting.
b. How should changes of accounting estimates that significantly affect income be reported? Should they be regarded as a change in accounting principle?
c. Research revenue recognition and discuss the accounting rules violated that brought down the company Sunbeam.
Explanation / Answer
a.) Negative Accruals : Negative Accruals, from my understanding is kind of like spending more money than what you have in the bank. When a company or business does poorly during the year they normally expect to have a better year the following year to atleast make up for the bad year.
Changes to estimates : The changes to estimates is something that needs to be recorded immediately as it effects the current and accuracy of accounts.
Recognizing Income before it is earned : Recognising income before it is earned is actually dangerous and inaccurate because you are basing decisions and accounts based on income that is not even earned.
b.) A change in accounting estimate is made when there is change in the carrying amount of asset or liabilty. An example of an accounting estimate change could be the recalculation of machine's estimated life due to wear and tear.Thus this accounting changes require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of change.
A change in accounting principle is a change in a method used, such as using a different depreciation method or switching from LIFO to FIFO. Thus Change in Accounting principle is completely different from change in accounting estimates.
c.) Revenue Recognition is an accounting principle under Generally Accepted Accounting Principles(GAAP) that determines the specific conditions under which revenue is recognised or accounted for. Generally, revenue is recognised only when a specific critical event has occured and the amount of revenue is measurable.
The company Sunbeam violates many significant accounting rules by using numerous improper tactics to inflate earnings. Expense of 1997 wrongly charged to 1996. the company created reserves which could be used to create fake profits in 1997. It unreasonably reduced the value of its inventory so that it could record large profits when the goods were sold. Thus , with the intention of fraud and showing huge profits the company Sunbeam didn't care about the accounting rules and violated these rules.