Financial Accounting Assignment for ACT204, Semester 1, 2019

This document presents a comprehensive solution to a Financial Accounting assignment (ACT204) for Semester 1, 2019. The assignment addresses several key accounting concepts. Question 1 focuses on current obligations for long service leave, including calculating the obligation and preparing the journal entries for recording long service leave expenses. Question 2 provides further accounting analysis. Question 3 covers additional accounting topics and provides detailed explanations. Question 4 delves into the concept of "cook the books," exploring its meaning and the signs that indicate financial statement manipulation. It examines earning and cash flow manipulation and misrepresentation of balance sheet items. Furthermore, the assignment discusses the use of creative accounting in the statement of cash flows, providing examples of how profits can be adjusted and manipulated. The solution includes a reference list, providing a basis for further research and understanding of the topics discussed. This assignment provides a complete answer to the questions asked.

Running head: FINANCIAL ACCOUNTING
Financial accounting
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2FINANCIAL ACCOUNTING
Table of Contents
Question 1........................................................................................................................................3
(a) Current obligation for long service leave..........................................................................3
(b) Journal entry for recording long service leave expenses..................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5
Question 4........................................................................................................................................7
(a) Meaning of “Cook the book”............................................................................................7
(b) Signs indicating the books had been cooked....................................................................7
(c) Employment of creative accounting to statement of cash flows.......................................8
Reference.........................................................................................................................................9
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3FINANCIAL ACCOUNTING
Question 1
(a) Current obligation for long service leave
(b) Journal entry for recording long service leave expenses
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Question 2
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Question 3
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Question 4
(a) Meaning of “Cook the book”
Cook the books is actually a slang term used for accounting tricks for making
adjustments in the financial statement to make it look better in financial term. It involves
manipulation of the financial date for inflating the earnings of the entity and deflating the
expenses with the motive to blow up the bottom line (Deegan 2016).
(b) Signs indicating the books had been cooked
 Earning manipulation – most of the entities aim to represent higher revenue as well as
profits for meeting or exceeding the expectation of the market. Significant higher
earnings for the current period as compared to the previous is strong factors that indicates
that the accounts have been manipulated (Clémenceau and Soguel 2017)
 Cash flow manipulation – though at quick glace it seems like the revenues as well as
profits have been manipulated. However, looking into the cash flows it can easily be
interpreted that earnings are not backed by the cash flows. Hence, through analyzing the
cash flows the investors can easily make it out that profits are converted into cash flow
from operation.
 Misrepresenting the balance sheet items – balance sheet items can be distorted through
different ways including (i) distorting accounts receivables for hiding the issues in
revenues (ii) distorting inventory metrics for hiding profitability issues (iii) distorting
metrics for financial assets for hiding impairment issues. Hence, looking into these items
and matching with sales and profits can easily make out that the accounts have been
manipulated (Caskey and Laux 2016)
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 Increase in receivables – recognition of inflated revenue without backing up the cash
collections will lead to increase in receivables on continuous basis. Increase in account
receivable at faster pace as compared to increase in sales indicates that the accounts are
manipulated (Caskey and Laux 2016)
(c) Employment of creative accounting to statement of cash flows
Yes, creative accounting were created to the statement of cash flows by Mr Hodgson
adjusted the profits in conventional way through making the legitimate corrections through
adjusting the profits. Further, the manipulation continued for long term since the year 1997
manipulating though unconventional and un-businesslike adjustments. Moreover, the profits of $
1.62 million were reported at $ 6 million through manipulation of the accounts along with $
605,000 million adjustments in gross profit. It also made adjustments amounting to $ 1 million to
the general ledger (Deegan 2016). These all adjustments are not possible for so long period
without employing creative accounting to statement of cash flows.
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Reference
Caskey, J. and Laux, V., 2016. Corporate governance, accounting conservatism, and
manipulation. Management Science, 63(2), pp.424-437.
Clémenceau, M. and Soguel, N., 2017. Does personal background influence a finance minister to
cook the books? An investigation of creative accounting in Swiss cantons. Applied
Economics, 49(10), pp.941-953.
Deegan, C. (2016). Financial accounting. 8th ed. NSW: McGraw-Hill Education (Australia) Pty
Ltd, p.739.
Tassadaq, F. and Malik, Q.A., 2015. Creative Accounting & Financial Reporting: Model
Development & Empirical Testing. International Journal of Economics and Financial
Issues, 5(2), pp.544-551.
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