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    Financial Accounting 2017 08

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    Qiaorong He
    This document summarizes a university lecture on financial accounting and financial statements. The lecture discusses the components of a complete set of financial statements, including the income statement, balance sheet, statement of cash flows, and notes. It also covers income statement presentation by function or nature, revenue recognition, fraud, and examples of past accounting frauds like Enron and WorldCom. The document provides an overview of the key topics and concepts covered in the lecture.

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    Financial Accounting 2017 08

    Uploaded by

    Qiaorong He
    50 views21 pages
    This document summarizes a university lecture on financial accounting and financial statements. The lecture discusses the components of a complete set of financial statements, including the income statement, balance sheet, statement of cash flows, and notes. It also covers income statement presentation by function or nature, revenue recognition, fraud, and examples of past accounting frauds like Enron and WorldCom. The document provides an overview of the key topics and concepts covered in the lecture.

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    ACCOUNTING 2017

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    This document summarizes a university lecture on financial accounting and financial statements. The lecture discusses the components of a complete set of financial statements, including the income statement, balance sheet, statement of cash flows, and notes. It also covers income statement presentation by function or nature, revenue recognition, fraud, and examples of past accounting frauds like Enron and WorldCom. The document provides an overview of the key topics and concepts covered in the lecture.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    50 views21 pages

    Financial Accounting 2017 08

    Uploaded by

    Qiaorong He
    This document summarizes a university lecture on financial accounting and financial statements. The lecture discusses the components of a complete set of financial statements, including the income statement, balance sheet, statement of cash flows, and notes. It also covers income statement presentation by function or nature, revenue recognition, fraud, and examples of past accounting frauds like Enron and WorldCom. The document provides an overview of the key topics and concepts covered in the lecture.

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    of 21

    FINANCIAL ACCOUNTING

    Lecture 8:
    Presentation of Financial Statements (cont.)

     SCHOOL OF BUSINESS AND SOCIAL SCIENCES


    AARHUS UNIVERSITET
    AGENDA

    • (continue on IAS 1)
    • Income statement by function or nature (Add. D)
    • The contents of financial statements in the EU (Add. E)
    • Revenue recognition and fraud

    Stefan Schaper - Spring 2017

     SCHOOL OF BUSINESS AND SOCIAL SCIENCES


    AARHUS UNIVERSITET
    Stefan Schaper - Fall 2017
    REFERENCES

    ​To prepare this lecture, you should read:

    • Add. Material** D + E

    *Harrison, W.T., Horngren, C.T., Thomas, C.W. & Suwardy, T. (2014): Financial Accounting: International
    Financial Reporting Standards, 9th ed., Pearson (Global Edition)

    ** available on BlackBoard

     SCHOOL OF BUSINESS AND SOCIAL SCIENCES


    AARHUS UNIVERSITET
    AARHUS
    UNIVERSITET

    COMPLETE SET OF FINANCIAL


    STATEMENTS
    General presentation requirements
    A Complete set of financial statements comprises:

    Statement of Statement of Statement of


    financial comprehensive changes in
    position income equity

    Statement of
    Notes
    cash flows

    FINANCIAL ACCOUNTING 4
    AARHUS
    UNIVERSITET

    COMPLETE SET OF FINANCIAL STATEMENTS


    A NOTE ABOUT INCOME STATEMENT
    IAS 1: categorize expenses by nature or by function:
    à whichever provides information that is reliable and more
    relevant

    1.Categorization by nature is to aggregate expenses according


    to nature

    2.Expense by function means the entity classifies expenses into


    functional categories such as cost of sales, cost of distribution
    etc.

    FINANCIAL ACCOUNTING Dias 5


    AARHUS
    UNIVERSITET
    Statement of
    2 – CATEGORIZING comprehensive
    EXPENSES BY NATURE income

    FINANCIAL ACCOUNTING Dias 6


    AARHUS
    UNIVERSITET
    Statement of
    2 – CATEGORIZING comprehensive
    EXPENSES BY FUNCTION income

    FINANCIAL ACCOUNTING Dias 7


    AARHUS
    UNIVERSITET

    INCOME STAT. BY FUNCTION - EXAMPLE


    In the function-based income statement, the costs are related
    to the specific functions, as production costs, selling costs,
    distribution costs and administrative expenses.

    How allocate a rent payment if not specified?


    à This could for example be based on the number m2 of those
    functions available:

    0230 Production 0330 Sale and distribution 0430 Administration

    80.000 15.000 25.000

    15200 Cash

    120.000 242
    FINANCIAL ACCOUNTING 8
    Classification by nature:

    Potomac
    Income Statement
    For year ended 31 December, 20X5
    In dollars
    20X5
    Sales revenue 480,000
    Expenses: Formatted Table

    Wages and salaries 139,000


    Depreciation 18,000
    Advertising expense 32,000
    Motor vehicle expense 75,000
    Utilities expense 27,000
    Interest expense 7,800 298,800
    Income before tax 181,200
    Tax expense 3,200
    Net income 178,000
    Classification by function:

    Potomac
    Income Statement
    For year ended 31 December 20X5
    In dollars
    20X5
    Sales revenue 480,000
    Cost of sales (57,000)
    Gross profit 423,000
    Sales and marketing (80,000)
    Distribution and logistics (93,000)
    Administrative expense (61,000)
    Interest expense (7,800)
    Net operating income 181,200
    Tax expense (3,200)
    Net income 178,000
    AARHUS
    UNIVERSITET

    Revenue recognition & fraud

    FINANCIAL ACCOUNTING 9
    AARHUS
    UNIVERSITET FROM LAST EPISODE….
    REVENUE – RECOGNITION
    DEFINITION: MEASURABLE
    › High reliability when measuring revenue
    › i.e. must be computed objectively and verifiably

    Revenue recognition is known as the most susceptible


    area to fraud
    › Recording fictitious revenue
    › Recognition of revenue when product/service not delivered yet
    › Delivery incomplete
    › Deliver without costumer acceptance

    FINANCIAL ACCOUNTING Dias 10


    AARHUS
    UNIVERSITET

    FRAUD
    › Definition:
    › Intentional misrepresentation of facts
    › Causes injury or damage to another party
    › Fraud is the ultimate unethical act in business

    › Why fraud:
    à Perpetrators gain short-term economic gain
    › Other incur economic losses the may outstrip the gain of fraudsters

    FINANCIAL ACCOUNTING
    11
    AARHUS
    UNIVERSITET
    TYPES OF FRAUD
    Misappropriation of Fraudulent financial
    assets reporting
    • Employees steal assets • Managers make false
    from the company entries so the company
    • Cash (cover it up through appears more profitable
    erroneous entries in the
    books) • Deceives investors and
    • Inventory creditors
    • False expense reports

    • Employees can act alone or


    in collusion See examples...

    Both of these types of fraud involve making false or misleading entries in the
    books of the company. We call this “cooking the books”.
    FINANCIAL ACCOUNTING
    12
    FRAUD
    AARHUS
    UNIVERSITET

    Big examples:
    •1985: Enron created in by merging 2 gas companies in Huston, TX
    •1999: Enron launces its broadband services and Enron online
    •August 2000: Enron shares reached an all-time high of 90$ and
    became the 6th largest company

    • Nov. 2001: Enron announces false


    reports of earnings of from 1997-
    2001 by 600mln $, fake sales and
    overstating assets
    • Dec 2001: Enron files for bankruptcy,
    largest in US history at the time

    FINANCIAL ACCOUNTING
    13
    FRAUD
    AARHUS
    UNIVERSITET

    • Jan 2002: Dep. of Justice begins investigation


    • Jan 25th, 2002: Enron vice-president Cliff Baxter was found dead in a
    car with a suicide letter

    FINANCIAL ACCOUNTING
    14
    FRAUD
    AARHUS
    UNIVERSITET

    • Jan 10th, 2002: Enron’s accounting firm A. Andersen claims that its
    employees destroyed Enron’s documents, and D. Duncan exercised
    the 5th amendment to not incriminate himself
    • June 2002: Skilling and Lay are found guilty of 25 different counts of
    fraud. Lay dies right before the sentence.

    • Enron scandal:
    http://www.youtube.com/watch?v
    =Mi2O1bH8pvw
    • Summary of Enron story:
    http://www.youtube.com/watch?v
    =stwcqdk7C_w

    FINANCIAL ACCOUNTING
    15
    AARHUS
    UNIVERSITET

    FRAUD
    http://www.youtube.com/watch?v=7g_d-
    phoUrU&list=PLIdnCp7Wq62Nv7l3xGYxQ8eA2tL_seD1V&index=1

    Big examples:
    ›WorldCom (2002) – reported expenses as asset and
    overstated both profit and asset
    àwhen discovered: company collapsed

    ›Who guards the guardians?


    ›Internal accounting company: Arthur Andersen approved all
    the balances! à forced to close its doors as well in 2002

    FINANCIAL ACCOUNTING
    16
    AARHUS
    UNIVERSITET

    FINANCIAL ACCOUNTING 17
    AARHUS
    UNIVERSITET

    FRAUD TRIANGLE

    • Need
    Motive • Greed

    Opportunity Rationalization
    • weak • distorted
    internal thinking
    controls
    FINANCIAL ACCOUNTING 18
     SCHOOL OF BUSINESS AND SOCIAL SCIENCES
    AARHUS UNIVERSITET

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