Question

Discuss examples of accounting malpractice that corporations have used in the past to bolster reported earning per share.

Answer 1

examples:

When an inventory is purchased for sale purposes, the cash is not recorded as an outflow at the time of purchase of the inventory but at the time the sale is recognised. This inflated the EPS, as the expenses are not recorded at the time , the payments are made for the purchase.

Whenever, there is discrepancy between the Sales figure and the cost of goods sold, which should ideally follow a very stable relationship. When there is large variations in this relation, then the company is manipulating the expenses to increase the EPS.

When the company receives goods and services and they have to make payments for it, it creates an accounts payable account. When this account keeps on increasing, it means that the company is delaying payments for the goods it is receiving. Delaying payments can artificially inflate accounts but ballooning accounts payable can indicate a future cash outflow that can hurt the balance sheet in the future.