Chapter 11: What creates a conflict of interest? Give an example. Chapter 12: Wh
ID: 2527867 • Letter: C
Question
Chapter 11: What creates a conflict of interest? Give an example. Chapter 12: What is a "big bath? Give an example using a liability account and an expense account tel and how it would create overstatement and/or understatement the balance sheet and income statement? Chapter 13: What does it mean to capitalize an expense? Give an example of this practice and explain the overstatement and understatement effect on the specific accounts used in your example on the balance sheet and the income statement Chapter 14: Give an example of an unreasonable expectation and explain how it might cause an employee to commit fraud or abuse.Explanation / Answer
Answer for chapter 11:
Conflict of interest is a situation where a conflict arises for an individual between two competing interests or we can say that where primary ineterst will be unduly affected by secondory interest.
Example of conflict of interest : Suppose you are a HR Manager and your Nephew applied for the job in your company and you interview him for the job. this is a classical example of conflict of interest.
Answer for Chapter 12:
BigBath: A big bath is an accounting term defined by a management team's strategy of manipulating a company's income statement to make poor results look even worse to make future results better. It is often implemented in a bad year for a company to enhance the next year's earnings in an artificial manner. or we can say that prebooking of expenses of writing off the assets in the current year leads to next years higher profit.
Example : Extra provisioning of Administartion expenses in the current year by $100000.
Dr. Adminsation expenses $100000
Cr. Expense payable $100000
It will reduce current year profit by $100000 by showing the higher liablities of $100000. in other words , its an overstatement of liability and expesnes and under statement of current year profit.
Chapter 13:
Capitalization of expenses means when an expenses is incurred but not chrged to Profit and loss statement during the current year and taken in balance sheet as Fictitious assets.
Example : Research and development expenses incurred during the current period is genearlly capitalise and spread over next 5 or 10 years depends on the benefot of reaserch.
Chapter 14
Unreasonable Expectation at workplaces are done by the employers from their employees and an example is : Impossible sales goals form an employee.
It may lead to fraud or abuse by an employee by providing wrong information or data to the management .
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