Accounting For Managers Essay Example | Topics and Well Written Essays - 2000 words

Accounting For Managers - Essay Example A deeper analysis would indicate that the purpose was to cover the cash shortage, which may represent misappropriation of company funds. Based on the auditor’s report, it appears that management is creating fake sales and fake purchase of equipment. The fake sales necessitated overstatement of inventory and understatement of cost of goods. However, the overstatement of inventory is reclassified to fake purchase equipment. These activities resulted in overstated sales, overstated income, understated cost of sales, overstated gross margin and overstated equipment. Overstatement of equipment might have been intended to defer the recognition of expenses through future depreciation expense. The volatility of accounts receivable and accounts payable compared to creditors was caused by fake accounts payable and accounts receivable at the same time for Red Desert. Faking the same is a way of manipulating cash. Red Desert’s high liquidity did not come from operation but from the investment of stockholders. A $10 million fresh infusion of equity in 2001 just went to wastage in 2001 because management is able hide the shortage of $ of 7 million cash. This would be fooling investors. If Red Desert has fooled the new investors in 2001, what is the assurance that they will not fool Surftex when the latter would have strategic alliance with it? It is really hard to deal with dishonest management. However, when we consider financial stability and liquidity of Red Desert as bases of having alliance with, it would appear that the debt-to-equity ratio and current ratio of Red Desert are still good. In terms of profitability, it is not too bad not to give it a chance. With the willing investors coming in 2001, it would show that there is a good prospect in its business. Therefore, it is recommended that unless Surftex would be given a controlling interest when strategic alliance is pursued, there is no reason to