1. What did you learn about the relationship between the income statement and ba
ID: 341742 • Letter: 1
Question
1. What did you learn about the relationship between the income statement and balance sheet?
2. Does your analysis raise any questions that might lead to a fraud hypothesis? Explain.
WorldCom Common Size Balance Sheet 2000 2001 $ $ Assets Current Assets: Cash & Cash Equivalents $761 $1,416 Accounts Receivable $6,815 $5,308 Deferred Tax Asset $172 $251 Other Current Assets $2,007 $2,230 Total Current Assets $9,755 $9,205 Property & Equipment $37,423 $8,809 Goodwill & Other Assets $46,594 $50,537 Other Assets $5,131 $5,363 Total Assets $98,903 $103,914 Liabilities & Shareholders' Investments Short Term Debt $7,200 $172 Accrued Interest $446 $618 Accounts Payable $6,022 $4,844 Other Current Liabilities $4,005 $3,576 Total Current Liabilities $17,673 $9,210 Long Term Liabilities Long Term Debts $17,696 $30,038 Deferred Tax Liability $3,611 $4,066 Other Liabilities $1,124 $576 Total Long Term Liabilities $22,431 $34,680 Commitments & Contingencies Minority Interest $2,592 $101 Contingencies $798 $1,993 Shareholder's Investment $55,409 $57,930 Total Liabilities $98,903 $103,914 WorldCom Common Size Income Statement 2000 2001 $ $ Revenues Operating Expenses Line Cost $15,462 $14,739 Selling, General & Administrative $10,597 $11,046 Depreciation $4,878 $5,880 Total Revenue ($30,937) $31,665 Operating Income $8,153 $3,514 Other Expenses/Income Interest Expenses ($970) ($1,533) Miscellaneous Expense $385 $412 Income before Income Tax Minority Interest $7,568 $2,393 Provision for Tax $3,025 $927 Income before Minority Income Tax $4,543 $1,466 Minority Interest ($305) $35 Effect of Alcing Change ($85) Net Income $4,153 $1,501Explanation / Answer
Ans : the relationship between the balance sheet and income statement is that cost are booked in income statement and corresponding liability if unpaid booked in balance sheet. Thus establishing a double entry book keeping system. Furthermore closing figure of income statement I.e. net income is transfered to liabilities side of balance sheet under shareholder investment.
Ans 2: yes if the cost are booked higher and no corresponding liability is raised and most being paid in cash, it raises a suspicion whether they are being actually paid or just books entries for commiting fraud of funds.
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