Question

"Compensation and Lending Decisions" Please respond to the following: Compare and contrast compensation plans, such as restricted stock and stock appreciation rights, indicating the key differences with the accounting treatment. Determine the option that would have the least impact on a company's earnings. Recommend the choice that is the most advantageous to an employee. Support your position with examples. Given the current regulatory environment for financial institutions, analyzing financial statement information is an important process and at the same time, the massive amount of information that creditors have to sort through can become unwieldy. Review the financial ratios in the text, and choose three or four that creditors would mostly likely use to make their lending decisions. Indicate a rationale for choosing each ratio. Discuss at least three ways that management might manipulate the financial data to guarantee that the lending decision will be made in its favor. Provide specific examples.

Answer 1

There are many ways by which the financial data are manipulated by the management. Some of the ways are below.

Delaying supplier payments

This is done to show the high balance in the bank accounts, even if the supplier payments are due the payments are not made before the year end is closed.

Accounts receivables

Sometimes the management does not records the bad debts expenses for the accounts on which the money has not been received even after the accounts has been due. This is done to show a large balance in the accounts receivables.

Revenue

Sometimes companies increase the revenue by creating some intercompany revenue invoices. Such invoices are issued credit memos In the next financial year.

Depreciation

Being non-cash expense, depreciation is not posted as per the norms and the assets are shown at a high value.

Accrued expenses

This is seen many times that the supplier invoices are not accrued in the year which they were for. This is done in order to withhold the expenses and record them in the next year.

With all the above tricks the management make sure that the balance sheet looks goods.