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Question 21Q

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Intermediate Accounting (Kieso)
Found in: Page 1446

Short Answer

Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?

Fraudulent financial reporting can occur when a flammable mix of powers and opportunities exists, and they are used in unethical business activity.

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Step by Step Solution

Meaning of Financial Reporting

Financial reporting can be an important process for companies and speculators it gives important data on what appears to be financial performance over time. Government and private administrative institutions also analyze financial reporting to guarantee fair exchange, remuneration, and monetary practice.

Step 2: Explaining the fraudulent financial reporting

It is defined as intentional or reckless behavior that results in materially incorrect financial statements, whether by act or exclusion. The reporting can have many components and manifest itself in a variety of ways.

This may include purposeful and pure alteration of business records, such as stock check labels, or deceptive transactions, such as fraudulent sales or orders. This may include inappropriate application of accounting rules.

Company representatives can be involved at any level, from the highest level of central management to lower level teachers. If the behavior is intentional or so irresponsible that it is a legitimate percentage of intentional behavior and results in a deceptive monetary expression, it falls within the working definition of the term fraudulent financial reporting.

Explaining the difference between fraudulent financial reporting from embezzlement of company funds

Reasons for significantly misleading financial statements, such as inadvertent mistakes, vary from fraudulent financial reporting. Fraudulent financial reporting is associated with other business weaknesses, such as labor extortion, violation of natural or product safety guidelines, and tax extortion, which does not necessarily render money-related explanations untrue in origin.

Most popular questions for Business-studies Textbooks

(Effect of Transactions on Financial Statements and Ratios) The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was $151.53.

Each numbered transaction on the next page is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2018 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement.

For each of the numbered transactions you are to decide whether it:

  1. Increased the corporation’s 2018 net income.
  2. Decreased the corporation’s 2018 net income.
  3. Increased the corporation’s total retained earnings directly (i.e., not via net income).
  4. Decreased the corporation’s total retained earnings directly.
  5. Increased the corporation’s current ratio.
  6. Decreased the corporation’s current ratio.
  7. Increased each stockholder’s proportionate share of total stockholders’ equity.
  8. Decreased each stockholder’s proportionate share of total stockholders’ equity.
  9. Increased each stockholder’s equity per share of stock (book value).
  10. Decreased each stockholder’s equity per share of stock (book value).
  11. Had none of the foregoing effects.

Instructions

List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s).

Transactions

  1. In January, the board directed the write-off of certain patent rights that had suddenly and unexpectedly become worthless.
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