Question

historical cost vs. economic worth, intangible assets (ie R&D), capitalized earnings, impairment, and depreciation choices are means to distort published financial statements. Discuss how financial reporting strives to accurately report the current position of firms given the above challenges.

Answer 1

Companies are often engaged into distortion of their financial result by manipulating their books of accounts through misreporting of various expenses and income and application of various modification to accounting principle through introduction of window dressing.

This window dressing methods are always focused on recording of income which are higher than the actual and expenses which are lower than the actual, so it is used to inflate the overall position regarding the profits of the company like it can be done through recognition of research and development expenses in order to provide with an idea of higher tax deduction or they can also show report impairment and depreciation through their own choices, which will be ultimately modifying the profits according to the needs of the company and it will help the company in order to report the profits according to their requirements, so that they could window dress their financial statement.

Financial reporting are set of principles which emphasizes on reporting of financial data accurately in order to maintain uniformity in recording of financial transaction throughout the company and industry according to the global standard, so that it can be followed without any window dressing and any scope for Miss representation of actual figures so that the financial fairness could be maintained and the interest of various stakeholders could be protected.