ACCOUNTING ANALYSIS
Most companies manipulate at least one item on their financial statements, particularly large firms and for this reason accounting analysis is performed to make any adjustments necessary to enable comparability between different entities. In order to find these financial manipulations, the accounting policies of each company need to be studied. On examination, most of the policies between the companies were very similar to each other , leading us to believe that these policies are an industry norm.
From the accounting policy examination, certain areas were highlighted for potential data manipulation and the following accounting adjustments performed when any significant issues were discovered.
Accounts Receivable Provisions:
Upon examination of VBA’s AR allowances it became apparent that a likely understatement of the provision for doubtful debts was occurring . In short, the provision went from an average of 4.5% over the last three years to 1.9% in 2008. For this reason, VBA’s account receivable has been adjusted by a further 1.9% to keep this in line with prior years.
Revenue:
Due to increasing overheads such as fuel and a slowing economy, REX would benefit from inflating their revenue figures to increase their net profit and investor return. Companies can achieve this by performing aggressive revenue recognition procedures which sees a temporary change in accounting policy for the benefit of the bottom line. When making the accounting adjustment to fix this manipulation, the reported income must be brought back in line with operating income – which in this case has been reduced by 40% to fix this revenue overstatement.
Depreciation:
When comparing the depreciation expense for VBA ...