Question

How can vendor allowances be used to cook the books? Give two examples.

Answer 1

Cook the books is a term used for using accounting tricks to make a company;s financial results look better than they actually are. This is done majorly by manipulating the company's data i.e. either by inflating the income or by deflating the expenses.

Examples of cooking the books through vendor allowances:

Books of Accounts can be manipulated through vendor allowances either by allowances (special discounts) received from the vendor or through understating the costs. Examples as below:

1. Allowance received from vendor:An allowance is a reduction in price granted by seller to the buyer on account of defective goods delivered or unsatisfactory goods sent. eg. ABC is a bike dealer and it received 10 bikes from XYZ Ltd. 5 Bikes had flat tyres. Now, ABC Ltd. although had a lot of good tyres to change but it demanded a discount for the defect in tyres and received $50 per bike as discount. This $50 X 5 i.e. $250 is vendor allowance which can be used by XYZ Ltd. to reduce its costing and inflate the books.

2. Understating the costs: ABC Ltd. received goods worth $5000 from XYZ Ltd. during the end of the quarter. ABC Ltd. recorded the purchases at $500 instead of $5000 and finalized the financial statements. This inflated the income of ABC Ltd, for the quarter end. Now, ABC Ltd. recorded the balance $4500 ($5000 - $500) during the next quarter in order to correct the financial statements.