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ACC 205 Financial Statements and There Importance in Outside Interests




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Financial Statements and There Importance in Outside
Financial Statements and There Importance in Outside Interests
ACC 205
Financial statements are used in accounting to give an accurate
representation of the financial health of a given business or entity. These
statements and their underlying importance of accuracy cannot be
overlooked. It is of the utmost importance for a business to present
accurate financial statements not only to meet reporting requirements
internally, but also to satisfying outside reporting expectations. This is
particularly crucial when it comes to outside business interests because
potential investors and potential lenders need to access financial
statements in order for them to make decisions based on the financial
status and overall performance of the business. Accurate financial
statements are also important for regulatory authorities as well as
government bodies (Homgren, C. Harrison, W. & Oliver, M. 2012). The
laws created around financial statements make it clear that companies
should make submissions of all their financial statements on an annual
basis. Tax authorities also must have access to financial statements in
order to looks at profits and if the correct amount of taxes are being paid.
When lenders or investors are evaluating a business they use the
information from the financial statements to look at the profitability or
lack thereof. By looking at this they are able make decisions based
things such as the likely hood of repayment of a loan and debit
obligation or potential investment into the company. “Business
transactions or events can pose ethical challenges. Accountants must be
honest in their work. Only with complete and accurate information can
help people make wise decisions” (Homgren, C. Harrison, W. & Oliver,
M. 2012).
The financial statements are prepared in order of income statement,
statement of owner's equity, and balance sheet. The income statement is
important for accountants to prepare accurate and complete financial
statements because other people rely on the data to make decisions

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(Homgren, C. Harrison, W. & Oliver, M. 2012).The income statement
sometimes called the statement of earnings or statement of operations
gives a representation of a business entity's revenues and expenses for
a period of time, such as a month, quarter, or year. What this does is
create a view of operations during the period which is vital information
because it shows if the company made a profit or a loss.
An example from our text is our week one discussion about Wai Lee the
owner of Xiaping Trading Company. In this example Wai lee is proposing
altering the financial statements in order to make the company appear to
be doing better than it truly is. This allows the company to appear
healthier and will assist the company to secure a new loan or more
financing for the business. Lee’s motivation is to keep the company
running and looking healthy, but he is not giving an accurate report. The
report should show as loss for the third year in a row and he suggest
doing two things to prevent that from happening, one is to temporally
transfer land in to the company’s name to beef up the books and the
other is to shave $500,000 from expenses. In order to accomplish this
Wai Lee needs his Company Chief Accountant Brent Ray to remove the
$500,000 from expenses. It is unethical for Wai Lee to ask his
accountant to remove the $500,000 from the expenses as it violates
codes of conduct and it is extremely unethical to present falsified
information to a creditor in order to secure a loan. The $500,000
represents company debt and by reducing the liability of the company it
will give the appearance that the company has less expenses and thus
making it appear stronger. Business transactions or events can pose
ethical challenges.
Another way to alter the financial statements would be by not recording
the depreciation expense at the end of the year. Failing to record
depreciation would overstate net income and paint a more favorable
picture of the company's financial position (Homgren, C. Harrison, W. &
Oliver, M. 2012). Dishonesty is a huge factor in the fraud associated with
financial statements and internal controls must be set up within a
company to prevent altered dishonest financial statements. These types
of controls could include policies a business implements for purposes of
fraud prevention. By safeguarding the assets of the business it will in
turn create accurate financial statements (Temte, 2004).
There are two main users of the financial statements a business
generates. The first group of users includes the internal users and the

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second group is made up of the external users or outside business
interests. The internal group is made up of the managers, owners of the
organization as well as the employees. The external users of financial
statements include amongst others the regulatory authorities, investors,
competitors, bankers, customers as well as suppliers. Accurate financial
statements are considerably more useful to outside business interests
than the internal users because external users do not have the day to
day interaction with the business and the employees within. Outside
business interests want to see the statement of cash flow, balance sheet
or statement of financial position, income statements as well as tax
reports, in order to access and make decisions about future dealing with
a company. Accurate financial records help such investors to make
investment decisions which are logical based on the information
contained therein. Accurate financial statements are also very important
for banking institutions. Banks usually use an entity’s financial
statements for many various reasons among the most important are for
purposes of determining whether or not to lend capital to a company.
A perfect example of a company fraud was the collapse of the Lehman
brothers in 2008. Lehman Brothers was a global leader in financial
services and when they went bankrupt in 2008 it was the largest
bankruptcy in history. The bankruptcy was larger than Enron, General
Electric, Washington Mutual and WorldCom combined. (Kroft, 2012) The
company had 26,000 employees all of whom lost their jobs. The
bankruptcy had devastating effects on the US and Global markets and
was a major factor in the global economic collapse of 2008. It was the
manipulation of financial statements that created trouble for the company
and eventually what brought it down. The company made use of an
Accounting technique called “repo 105” in which at its peak in of use in
2007 was transferring 50 billion dollars in assets from the Lehman
Brothers US Financial Statements to the Lehman Brothers European
Financial Statements. This was strategically done so that when the
Financial reports were completed it appeared that the 50 Billion dollars in
assets was both in the European accounts and the US accounts thus
making the company seem to have 50billions dollars in assets more that
it really did. The most troubling thing about this is that when Aton
Valukas a US Attorney that investigated and reported on the Lehman
Brothers Collapse found considerable evidence that the company’s
accountants Ernst & Young had knowledge of the fraud and may even
have assisted in it. That is a scary thought and a clear indication of how

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