Question

How does each one of these affect the financial statements (Increased assets, Increased revenues, Decreased liabilities)?

1- Avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives

2- Assigned arbitrary salvage values to other assets that previously had no salvage value

3- Failed to record expenses for decreases in the value of landfills as they were filled with waste

4- Refused to record expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects

5- Established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses

6- Improperly capitalized a variety of expenses

7- Failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.

Answer 1

1. Depreciation expense is a charge against profit hence if depreciation is charged less then automatically your profit is higher . Also it increases the asset value as the exact depletion is not taken into account and shown at inflated value.

2.Again increase in the value of the asset

Assigning arbitrary values to the assets will decrease depreciation over the useful life and charging less depreciation will show the asset at a higher value.

3. Failure to record expenses shall decrease the liability as the liabilty for those expenses have not been recorded at all , the liabilities are undervalued.

4. Accumalated expenses for such costs which were to be deferred over several years are shown as an asset . Such assets which are no longer of any use shall be written off to the profit/loss account. However not writing off such assets will show overvalued assets i.e, fictitious assets and also not show correct profit.

5.Recording reserve instead of a liabilty will sure tie off the balance sheet however will undervalue the liabilties.

6. Capitalisation of expenses to assets will increase the assets and not charging them to profits will increase the profits . Further adding them to liabilties will increase the liabilities and not charging them to profits will show incorrect profits.

7.Unrecorded liabilties will show less liabilties or undervalued liabilties.