. Accounting principles generally forbid a company from recognizing an increase in the value of its...

. Accounting principles generally forbid a company from recognizing an increase in the value of its capital stock in its income statement” Explain the above accounting statement based on Enron case. How Enron disrupt or volatile the above statement?

Expert Solution

Conservative principle of accounting state that provide for all possible losses but don’t recognize any income till it is realized that is if there is any increase in the value of any assets, we cannot recognize the same due to the fact that it is assumed that firm will continue in future following going concern principle of accounting and another thing that same are to be shown at historical cost only unless there are such circumstances which put doubt on the existence of firm in near future. Conservatism Principle is a concept in accounting under GAAP which recognises and records expenses and liabilities-certain or uncertain in nature, as soon as possible but recognises revenues and assets when they are assured of being received. It gives a clear guidance in recording cases of uncertainty and estimates. It is due to this principle that closing stock is valued at cost or market price whichever is less so that if there is any fall in market price which is below the cost , then same can be recognized in order to make financial statements more accurate and realistic.

How Enron disrupt or volatile the above statement?

The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the- books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates. These facts clearly show that financial statements were manipulated in order to show desired financial results.

ekkarill92 answered 2 years ago

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