Question

On January 20, 2020, Tony North, the accountant for Public Enterprises, is feeling pressure to complete the annual financial statements. The company president has said he needs up-to-date financial statements to share with the bank on January 21 at a dinner meeting that has been called to discuss the company obtaining loan financing for a special building project. Tony knows that he will not be able to gather all the needed information in the next 24 hours to prepare the entire set of adjusting entries. Those entries must be posted before the financial statements accurately portray the company's performance and financial position for the fiscal period ended December 31, 2019. Tony ultimately decides to estimate several expense accruals at the last minute. When deciding on estimates for the expenses, he uses low estimates because he does not want to make the financial statements look worse than they are. Tony finishes the financial statements before the deadline and gives them to the president without mentioning that several account balances are estimates that he provided.

Required:

If you were in Tony's situation, (1) what would you have done and (2) why would you had made that choice? Please justify your post with an explanation.

Answer 1

1) If I would been in Tony's situation, I would have also prepared the financial statements on the basis of estimation because in the given time period that was the only solution to provide required information to the bank, But I would have done the estimation of accruals on justified basiis Apart from that I would have clearly mentioned that the figures are calculated by estimation and the basis of my estimation should have been also communicated to the bank to enable it a proper decision making.

2) Financial statements are a set of statements on the basis of which the banker is going to decide upon the company's financial solvency and creditworthiness, so to enable them to make a proper decision relating to lending of Funds is very important. So, they are supposed to be furnished with the accurate information. Else they may overestimate the returning capacity of the company and lend more which may lead to default by the company in future. So, to guide them about estimation and its basis becomes very important in this scenario.