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Financial Accounting – Inventory


Please give your opinion based on the article as well as cited work- Only Accounting Majors Financial Accounting – Inventory There are three primary reasons why management manipulates financial statements. · First, in many cases the compensation of corporate executives is directly tied to the financial performance of the company. As a result, management has a direct incentive to paint a rosy picture of the company’s financial condition in order to meet established performance expectations and bolster their personal compensation. · Second, it is relatively easy to manipulate corporate financial statements because the Financial Accounting Standards Board (FASB), which sets the GAAP standards, provides a significant amount of latitude in the accounting provisions that are available to be used by corporate management. · Third, it is unlikely that financial manipulation will be detected by investors due to the relationship between the independent auditor and the corporate client. Some of the more well known (and maybe less well known for some, I guess) instances of financial manipulation include: · Enron · Worldcom · Bausch and Lomb · Crazy Eddie · Equity Funding Corp · McKesson and Robbins · Republic of Poyais In each of these instances, financial accounting was manipulated (inventory manipulation, cash skimming, fake purchase orders, illegal cash transfers, etc…) and ultimately wound up defrauding thousands of investors. Short story – Some years ago, I was a new project manager for a company in Nashville that had just been awarded a contract for maintenance and construction services. In talking with the staff around the water cooler, I learned that the previous company had lost the contract due to theft and fraud. Specifically, the warehouse management team had for some years been receiving and rerouting truckloads of equipment and material to Dallas. When received in Dallas, a compatriot would sell the inventory and split it among their little group. The enterprise would have continued further if not for a junior shipping clerk who asked a question when one of the shipments was being diverted. The response from the warehouse manager created a question in the clerks mind and, when a similar truck was rerouted later, led the clerk to bring it to the company management team. Within weeks, the venture was outed and numerous criminal charges filed. If not for a questioning attitude by the clerk and swift response by management there is no telling how much longer the thefts would have continued to occur. Cash Management The term ‘cash’ constitutes the most readily acceptable item of current assets to a firm. The finance manager must ensure that there is sufficient cash in the business. If there is excessive cash, the financial manager must seek to invest in low-risk highly liquid money market instruments that are conveniently convertible into cash. If there is inadequate cash the financial manager must manage it to avoid payment problem. Cash is regarded as both input and output of a business operation. Cash serves as input in a sense that all business activities are carried on without any obstructions with the availability of cash. All business works begin with the provision of sufficient cash to do business. At the same time, the cash is the thing that a businessman ultimately wants to achieve through the sale of goods and services. Cash as a means and ends of business operation must be held in sufficient quantity. Holding of cash both in excess and insufficient amount may lead a firm to problems. Shortage of cash puts obstruction in the production process whereas excessive cash than requirement contributes nothing to the profitability of the firm as idle cash earns nothing. Therefore, a financial manager faces a challenge of maintaining optimum level of cash, which bypass the ri


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