Question

According to the SEC, “[A]s part of the cover up, Peregrine personnel wrote off millions of dollars in uncollectible—primarily sham—receivables, to acquisition-related accounts” (LR 18205A).

1. Explain how this would affect the signal of CFFO lagging, or falling behind, operating income that would normally indicate an overstatement of revenue.

2. Explain how the improper write-off of accounts receivable as “acquisition costs” would affect the signal of accounts receivable increasing as a percentage of sales.

Answer 1

1. Explain how this would affect the signal of CFFO lagging, or falling behind, operating income that would normally indicate an overstatement of revenue.

Answer: Write off of accounts receivable occurs when the company is not able to collect the amount from the customers. In this case, the most of its accounts receivables were not from the proper sales and revenue recognition itself is misstated for suiting the requirements of the company.

2. Explain how the improper write-off of accounts receivable as “acquisition costs” would affect the signal of accounts receivable increasing as a percentage of sales.

Answer: If an entity with the intention of overstating its revenue books income from fake invoices, then it will have effect in the income statement and accounts receivable balances in the balance sheet. The improper write off of accounts receivable as “acquisition costs” would help the company in reducing its accounts receivable amount ballooning in its balance sheet. Hence the balance sheet will look healthier.