Question

Briefly explain five specific ways financial statements can be manipulated. For each way, provide a specific example and describe the effect of that example on the Statement of Financial Position and the Statement of Profit or Loss.

Answer 1

SOLUTION

Five specific ways in which financial statements can be manipulate

1.Recording false revenue -Recording sale revenue that actually didnot take place or recording any interest received as revenue .

example sales which are not actually made has been shown as revenue sales . It will increase net income in statement of profit or loss statement and increase retained earning in finacial position which might result in excess payment of dividends .

2. Not following cut off date to record expenses - Cut off date is date which segregate two accounting periods . when an expense is recorded in earlier or later period .

example salary due for year 2019 should be recorded in 2019 only but is recorded in year 2020 .in this case net income of statement of profit and loss will decrease which may result in evasion of tax and will reduce retained earnings resulting in less dividend than required .

3.Not recording liabilities or improperly reducing liabilities - It might reduce the expense or purchases and result in increse in net income .

Exampe salary in arrears are not recorded it will reduce expenses and reduce net income in statement of profit and loss and result in increse in retained earnings and decrease in liabilities in statement of financial position.

4. Transfering current period revenue to later period - Not recording revenue in period it take place but recording it in any later period .

Example good sold on credit in year 2019 is not recorded in that year but is recorded in year 2020 this will result in decrease in net income in year 2019 in statement of profit and loss and decrese in retained earnings in statement of financial statement .

5.Shifting future expenses to current period - Recording any expenses of any future period in current period it will reduce net income of current year.

Example recording insurance paid in advance as expense of current period will result in decrease in net income and decrease in retained earnings.