Question

1. We know entries made in tally or any other accounting software, are included in financial statements. I want to know that-
A) If an excel spreadsheet is used by a company to record inventories like for internal control, will it be considered as a part of financial statements (Total balance(unsold) inventory will be shown in the balance sheet, which is taken from the excel spreadsheet)

2) What benefit may arise to the company, if it intentionally Shows 1.3 million Usd worth building for 1 million ( undervaluation, note building was already owned years ago, here it is deliberately undervalued)

Now from screenshots-

3) I don't understand how expense(which is product of Income statement) shown in balance sheet, and how an expense can an asset, I know it can if we pay in advance to present the expense on asset side but if we pay in advance them cash will be reduced, and the balance sheet remains same.

4) How off balance sheet is illegal and fraud. according to example, neither it looks like fraud nor illegal. there is no play for expense and rental obligation in balance sheet, also how certain asset and liabilities can be excluded from balance sheet , where is auditor? and if we reduce asset and liability from both side of balance sheet, how it is going to do benefit

Delaying or accelerating a company's expenses Showing an expense as an asset on the balance sheet rather than writing it off immediately against profits is a quick way to improve your reported profits, as practised spectacularly by World Com before its collapse. This is contrary to acceptable accounting practices.

Answer 1

Answer 1.

A company can records its inventories in mainly two ways i.e. Manually or Electronically.

Manually means noting down ins and outs of inventories in a hard copy register by store keeper, calculating closing balance and then getting it signed by the stores keeper and store in charge. It is then sent to the HO for their recording.

Electronically means using a software like tally, busy win or SAP for recording ins and outs of inventory by the store keeper. The software calculates the closing balance automatically and intimates the HO.

In both of these cases, HO verifies/monitors the closing balance by using day end/month end physical verification, surprise verification.

The benefit of using electronic method of inventory keeping is that it eliminates calculating mistakes and brings efficiency in the process. further, with 24/7 inventory balance available helps in effective decision making. Also, it prevents frauds or misappropriations as the inventory balance is sent to the HO on a daily basis. there are chances of minor thefts but this system reduces the chances of big frauds.

Now, to your question, YES, we can use excel for inventory management. However, there is a huge risk and chances of misappropriations are high. The auditor of such company will audit this area extensively and mention this in his audit report. Further, auditor will ask for management explanation as to why inventory management process is manual.

Answer 2.

If a company intentionally undervalues a building values, the reasons might be:-

a. it wants to improve its Returns on Assets and show that it is earning more on its assets.

b. to lower company valuation by reducing its assets. It wants to show investors or banks that the value of company is lower. This usually happens to ward off potential takeovers.

Answer 3.

Firstly, expense is not an asset. Making an advance payment for an expense is an asset. Because, the liability for paying an expense has not arose as of now, but still i have made the payment.

Also, under stand what an asset means, assets are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars.

so, in this case, since i have made the payment earlier, when the liability to pay an expenses arises, i will not have to incur any expenses. i.e future economic value. Hence, these advance payment of expenses are assets.

Answer 4.

In this given case, the auditor should have asked the company to disclose the contractual payments in the notes to financial statements. Also, if the amount of contractual payments are material, then auditor should have mentioned the same its audit report.

I would like to conclude by saying that integrity of the auditor and management is the most important thing. We have laws and regulations about everything. but, if our moral standards are low then no one can save us.