Interpret

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Interpreting Company Accounts

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Interpreting Company Interpreting Company Accounts Accounts

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Window Dressing

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Window Dressing • ‘Window dressing’ refers to attempts by business to present its accounts in the best light • Has become more of a necessity as pressure to please shareholders and the City increases • It is NOT illegal • Deliberate deception in the accounts is fraud Copyright 2006 – Biz/ed

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Window Dressing • How do firms ‘massage’ the accounts? • Timing of reporting • Balance sheet – snapshot of a business at a point in time, therefore: – Delay major payment – Include large injection of cash/assets

• Exploit accounting procedures – often a wide range in the definition

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Window Dressing • Exploiting other definitions – extraordinary items – what counts as ‘extraordinary’? • Depreciation – different results gained using different methods – which is the ‘best’ and the most accurate? – Residual values – could be altered Copyright 2006 – Biz/ed

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Depreciation

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Depreciation • When businesses buy fixed assets (those that will last longer than one year) the value of the asset will change • Depreciation seeks to take account of such changes in the accounts • An imprecise science allows different interpretations

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Depreciation • Take the machine here:

Mill Drill Machine Copyright: Kenn Kiser, http://www.sxc.hu

– What is its life span? – How much did it cost originally? – How much will it be worth at the end of its useful life? – What will be its value after 1 year? – After 2 years, 4 years, 15 years? – Would anyone else want to buy it? – How specialised is it? – What would it cost to replace after 5 years? Copyright 2006 – Biz/ed

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Methods • Key terms: • Historical Value - initial purchase price • Value at the end of the life of the asset - the Residual Value (RV) • Life span of the asset • Straight Line – Historic cost - RV/Useful life • Declining Balance – Depreciating assets at a constant rate each year Copyright 2006 – Biz/ed