Question

 

Early one Wednesday afternoon, Ken and Larry studied in the dormitory room they shared at Fogelman College. Ken, an accounting major, was advising Larry, a management major, regarding a project for Larry’s Business Policy class. One aspect of the project involved analyzing the 2021 annual report of Craft Paper Company. Though not central to his business policy case, a footnote had caught Larry’s attention. 

 

 

 

“If I understand this right, Ken, the company is not going back and recalculating a lower depreciation for earlier years. Instead they seem to be leaving depreciation overstated in earlier years and making up for that by understating it in current and future years,” Larry mused. “Is that the way it is in accounting? Two wrongs make a right?” 

 

Required:

What are the two wrongs to which Larry refers? Is he right?

 

Answer 1

 

Various reasons can lead to accounting errors or irregularities. A simple oversight may also result in accounting error or irregularity. Say, goods in transit may have not been included by buyer in its closing stock, when title stands transferred upon shipment of goods by seller. Some errors may arise due to disagreement of different parties for accounting of a particular transaction, due to incorrectly applying GAAP. Say, there may be disagreement upon satisfaction of “critical event” and “measurability” conditions for revenue recognition among some practicing chartered accountants. Also, some errors arise due to attempting exploitation of flexibility in GAAP or trying to commit financial fraud by inflating earnings and overstating net assets.

 

Requirement of Questions:

Larry clearly is alluding to the way that on the grounds that the organization currently accepts the valuable existences of the resources are longer than before that devaluation determined expecting the more limited long term life was exaggerated. Presently when lower depreciation is not being calculated for prior years, it would reduce un-depreciated cost of asset. This would consequently reduce the amount of depreciation. Thus, before such change depreciation is "excessively high" and after such change it is "excessively low".

Larry is correct on the off chance that we acknowledge his reason that deterioration was, indeed, "excessively high" before the change. That viewpoint appreciates the advantage of knowing the past. At the point when the first gauge was made, 16 years was viewed as the suitable valuable life. The bookkeeping calling contends that on change in conditions, gauges change, and that subsequent irregularities are unavoidable. Consequently, changes in gauges are represented tentatively. At the point when an organization reconsiders a past gauge, earlier fiscal reports are not reexamined. All things considered, the organization simply fuses the new gauge in any connected bookkeeping judgments from that point on. The outcome, nonetheless, is as Larry depicts: In case, new gauge is utilized then depreciation would be higher before such change and lower after such change.

 

Larry clearly is alluding to the way that on the grounds that the organization currently