Effect on the Financial Statements - Paper Example

Published: 2023-09-27
Effect on the Financial Statements - Paper Example
Type of paper:  Essay
Categories:  Audit Accounting Business ethics Financial analysis Essays by wordcount
Pages: 2
Wordcount: 487 words
5 min read

The disproportionate purchase price allocation that seeks to quote the land at a higher price than the building is likely to raise the figure quoted on land in the statement of financial position. The numbers given in the balance sheet will be wrong, and this is likely to have an effect in the future when the assets are later evaluated. The figure quoted on buildings will also be wrong, and the depreciation value computed on this building and transferred to the income statements will also be wrong. Therefore, these books of accounts will require adjustments in the future due to the entry of wrong figures on land and buildings. Therefore, the books of account will be misleading, and the various stakeholders interested in the affairs of this company are likely to make the wrong decisions if they rely on the figures posted in these accounts.

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Controller’s Motivation

A controller should act based on the interest of the company, and the officer has a duty to ensure that the books of accounts have the right figures. Therefore, when the official recommended for a disproportional allocation of the purchase price, it means that there is a problem. One of the motivations that may be leading the controller to act in this manner is the desire to lower the depreciation expense that is recorded in the income statement. The final outcome will be a higher net income, which is misleading since the real income should be lower if the right depreciation amount is recorded. An organization may agree with the controller that the profit-sharing bonus will be raised if the company manages to raise the revenue amount raised in a given financial year. The personal interest in earning the bonus may be behind the controller’s desire to post unequal figures for the land and building. Another motivation may be raised by the desire to raise the company’s stock prices, a move that is likely to attract investors who will provide funds that can be utilized in the company’s expansion programs. However, this will be misleading since the shares may be overvalued by the controller's desire to influence some of the figures posted in the organization’s books of account.

Ethical Consideration

In this case, ethical considerations are raised that include the lack of transparency, and there is possibility of risk of harm occurring. Organizations are supposed to provide the right information when they are preparing the books of accounts. However, if this fails to happen, the issue of window dressing is likely to mislead the various parties that are relying on the details in the financial statements to make decisions on investments. Risk of harm is likely to happen when they use the account recording, for they may experience losses. When the reported income level is high, there is a possibility that the taxes charged to the company will also increase.

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