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Accounting Essay

1605 words - 7 pages

Good accounting gone bad
Principal of Accounting 1

1. Anatomy of a financial sheet
a. Assets
b. Revenue
c. Expenses
2. Financial statement errors
a. Enron
b. WorldCom
c. North Babylon Union Free School District
3. Sarbanes Oxley Act
4. Corporate Accountability

Accounting has been defined as "the language of business" because it is the basic tool for recording, reporting, and evaluating economic events and transactions that affect organizations. For the financial statements to be of value, it is imperative they are accurate and presented in conformity with accounting standards. As a result, it is eminent that the financial statements are accurate, ...view middle of the document...

Assets are valuable quantities or possessions, also known as the resources owned by the company such as property, equipment, and cash. A liability is defined as the condition or state of being legally or rightly responsible; simply stated it is the amount owed to creditors on debts. Income statements show the company’s success or failure over a period of time. The income statement lists the company’s revenue and expenses. When the company’s revenue exceeds its expenses, it reports a net income; otherwise it will report a net loss. Investors are interested in the company’s past net income because it foretells the company’s future. With no crystal ball at their disposal, creditors review income statements to foresee the future of a company. When an organization requests a loan the loan officer of the bank will use the income statement as guide to predict the probability of the company’s ability to pay back the loan. If the financial statements are inaccurate the loan will be granted on false pretenses thus negatively impacting both entities that will stand to lose an absorbent amount of money. The main objective of the financial report is to provide information. The information provided in the financial statements is used by individuals making credit and investment decisions. The information will also assist in projecting future cash flow and helpful to identify assets, liabilities, and changes within them. Accurate financial statements are essential for informed decision making. Financial statements form part of the process of financial reporting. Retained earnings are the net income retained in a corporation. The retained earnings statement shows the amounts and causes of change in retained earnings during a period of time. By watching the retained earnings statement, financial statement users can evaluate dividend payment practices. Some investors look for companies that are reinvesting the earnings instead of paying out dividends to help increase the company’s growth. Lenders monitor their corporate customers’ dividend payments. Money paid in dividends reduces the company’s ability to repay their debts. If this information is reported inaccurately on the financial statement the investors are at risk of losing revenue.
You do not have to be a CPA to understand the impact of inaccurate financial statements. Most individuals are aware of two infamous examples of how inaccurate financial statements have imploded large corporations reducing the once powerful entities into piles of rubble. The Enron and WorldCom accounting scandals rocked the United States. Enron overstated profits and went out of business almost overnight. WorldCom (now MCI) reported expenses as assets and overstated both profits and assets. The company is just now emerging from bankruptcy. Sadly, the same accounting firm, Arthur Andersen audited both of the company’s financial statements causing them to close its doors. (Horngren & Harrision pg 156). Many Americans watched the...

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