Question

On January, 21, 2019, Claire Holden, the accountant for ABC Analytics, is experiencing pressure to complete the company's annual financial statements. The company president has said he needs the financial statements to present to the bank on January 22, 2019 in connection with loan financing for a special building project. Claire understands she won't be able to prepare the entire set of adjusting entries needed to complete the statement. The entries are necessary to accurately show the financial performance and position for the fiscal ending December 31, 2018. Claire makes the decision to estimate several expense accruals in order to meet the president's requirement. She estimates the expenses on the low side because she does not want the financial statements to appear worse than they really are. She completes the statements on schedule using the low estimates but makes no mention to the president about what she did.

1) Identify any other options she could have considered.

2) If you were Claire what would you have done. State your reasons why.

Answer 1

1) There were various options available with Claire as follows:

a) She could have verified the figures of the expenses in the financials of the corresponding quarter in order to determine the near to accurate figures regarding the expenses in that period of the year.

b) She could have verified the projections of the production unit in the month of January to estimate the expenses based on prospective work.

c) She could have drawn out the figures from the budget that would have been prepared regarding the expenditure in the month of January.

d) She could have verified a few invoices on test check basis as per pareto analysis i.e she should have verified the 10% bills that comprise of 90% expenses.

2) If I would have been Claire, I would have focused on getting the figures as near as possible to the actual figures. It is because the financials are prepared in order to apply for the loan relating to a special project. Therefore, it is necessary to maintain the integrity of the company in front of the lenders to increase its credit score.