Accrual Accounting
Near the end of the fiscal year, preliminary financial results revealed that Stancomb Wills Company was in danger of not meeting corporate performance goals. According to an article in the business press, top executives at Stancomb Wills responded by deferring many expenses “beyond accepted accounting norms, and revenue was inappropriately booked far in advance.” These practices had the effect of “making the current quarter look more profitable. ”The top executives of Stancomb Wills were hoping that an upturn in the economy would spur sales that would provide additional profits to cover the deceptive accounting practices.
1. How are expenses deferred and revenues booked (recorded) in advance? What would the journal entries be?
2. Why would top executives encourage these misleading accounting practices?
3. None of the top executives who ordered the misstatements actually made the journal entries. If you were Stancomb Wills’ accountant, what would you have done?
4. Is Stancomb Wills’ independent auditor responsible for detecting these types of misstatements?