Corporate Accounting Homework: Financial Reporting and GAAP Analysis

This document presents solutions to a corporate accounting assignment, addressing key aspects of financial reporting and accounting principles. The assignment delves into the rationale behind deducting litigation income from the cost of sales, exploring the implications of earnings manipulat...Read More

CORPORATE ACCOUNTING 1
CORPORATE
ACCOUNTING

CORPORATE ACCOUNTING 2
Answer 1:
One of the rationale behind deducting the amount of the litigation income from the cost of
sales could be the fact that as per the relevant accounting standard, an income is something
which is capable of being recorded in the books of accounts and which can be measured with
reliability and which would result in an inflow of the economic benefit to the company in the
near future. In the given case, the company may have thought that, even though it had opted
out of the settlement but it could still receive the stated amount, if it agrees with the third
party. So, it went on to deduct the amount from cost of sales since it related with the revenue
of the company. It did not go for reporting it below the line since that would have resulted in
the decrease in the amount of net income or net profit for the company. And the management
of the company wanted to report the actual net profit earned by the company in line with the
budgeted amount of the net profit.
Answer 2:
“Include to steal from Q3” merely means that the company had been misreporting the
financials contained in the financial statements. In order to report a better picture of the
company, it is manipulating the earnings by the way of inflating them or reporting lesser
amount of expenses so that more net profit could be reported in the books of accounts. This
could be done by the way of reporting some incomes which belonged to the previous quarter
to be reported in the current quarter, so that the current quarter could show some profits. Or
this could be achieved by the way of reporting of some of the expenses which pertained to the
revenues of the current quarter but being reported in the previous quarter so that there are
lesser expenses and more revenue for the company ("Provisions, Contingent Liabilities and
Contingent Assets", 2019).
Answer 3:
It got into trouble with SEC since it failed to follow the basic principles of GAAP. As per
GAAP rules and accounting principles, any amount of revenue which is earned during the
period shall be reported in the same period and the amounts of the expenses in respect of that
revenue would be reported in the same period. Also, the amount of the litigation expense
reported in the books of accounts shall form the part of the notes to the financial statements
since that is contingent in nature and the certainty of it is not known yet. It could either result
in an outflow or an inflow of funds for the company ("IAS 37 PROVISIONS,
CONTINGENT LIABILITIES AND CONTINGENT ASSETS", 2019).

CORPORATE ACCOUNTING 3
Answer 4:
The timing of these funds could be justified by stating that since the amount of the net profit
were less when compared with the budgeted profit, the management though it wise to include
such incomes in their financials so that an improved financial picture of the company could
be represented. They would now need not steal figures from the previous quarter.
Answer 5:
When the amount of $22 million is received, then the company could report the same in its
annual accounts but not before that. So, keeping in mind this fact, the decision of SEC to hold
the company guilty of not following the relevant GAAP principles is correct ("UNITED
STATES SECURITIES AND EXCHANGE COMMISSION, v. CARDINAL HEALTH,
INC.", 2019).

CORPORATE ACCOUNTING 4
References:
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS. (2019).
Retrieved 29 September 2019, from
https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/professional-
resources/reporting/reporting-ifrsfactsheet-provisions-contingent-liabilities-and-contingent-
assets.pdf?la=en&rev=304b9d655150433ca82e89a2eb9d7981
Provisions, Contingent Liabilities and Contingent Assets. (2019). Retrieved 29 September
2019, from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-
04_COMPjun14_04-14.pdf
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, v. CARDINAL
HEALTH, INC. (2019). Retrieved 29 September 2019, from
https://www.sec.gov/litigation/complaints/2007/comp20212.pdf