FINANCIAL ACCOUNTING

Lecture 8:
Presentation of Financial Statements (cont.)

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AGENDA

• (continue on IAS 1)
• Income statement by function or nature (Add. D)
• The contents of financial statements in the EU (Add. E)
• Revenue recognition and fraud

Stefan Schaper - Spring 2017

 SCHOOL OF BUSINESS AND SOCIAL SCIENCES

AARHUS UNIVERSITET
Stefan Schaper - Fall 2017
REFERENCES

​To prepare this lecture, you should read:

• Add. Material** D + E

*Harrison, W.T., Horngren, C.T., Thomas, C.W. & Suwardy, T. (2014): Financial Accounting: International
Financial Reporting Standards, 9th ed., Pearson (Global Edition)

** available on BlackBoard

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COMPLETE SET OF FINANCIAL

STATEMENTS
General presentation requirements
A Complete set of financial statements comprises:

Statement of Statement of Statement of

financial comprehensive changes in
position income equity

Statement of
Notes
cash flows

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COMPLETE SET OF FINANCIAL STATEMENTS

A NOTE ABOUT INCOME STATEMENT
IAS 1: categorize expenses by nature or by function:
à whichever provides information that is reliable and more
relevant

1.Categorization by nature is to aggregate expenses according

to nature

2.Expense by function means the entity classifies expenses into

functional categories such as cost of sales, cost of distribution
etc.

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Statement of
2 – CATEGORIZING comprehensive
EXPENSES BY NATURE income

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Statement of
2 – CATEGORIZING comprehensive
EXPENSES BY FUNCTION income

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INCOME STAT. BY FUNCTION - EXAMPLE

In the function-based income statement, the costs are related
to the specific functions, as production costs, selling costs,
distribution costs and administrative expenses.

How allocate a rent payment if not specified?

à This could for example be based on the number m2 of those
functions available:

0230 Production 0330 Sale and distribution 0430 Administration

80.000 15.000 25.000

15200 Cash

120.000 242
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Classification by nature:

Potomac
Income Statement
For year ended 31 December, 20X5
In dollars
20X5
Sales revenue 480,000
Expenses: Formatted Table

Wages and salaries 139,000

Depreciation 18,000
Advertising expense 32,000
Motor vehicle expense 75,000
Utilities expense 27,000
Interest expense 7,800 298,800
Income before tax 181,200
Tax expense 3,200
Net income 178,000
Classification by function:

Potomac
Income Statement
For year ended 31 December 20X5
In dollars
20X5
Sales revenue 480,000
Cost of sales (57,000)
Gross profit 423,000
Sales and marketing (80,000)
Distribution and logistics (93,000)
Administrative expense (61,000)
Interest expense (7,800)
Net operating income 181,200
Tax expense (3,200)
Net income 178,000
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Revenue recognition & fraud

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 AARHUS
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REVENUE – RECOGNITION
DEFINITION: MEASURABLE
› High reliability when measuring revenue
› i.e. must be computed objectively and verifiably

Revenue recognition is known as the most susceptible

area to fraud
› Recording fictitious revenue
› Recognition of revenue when product/service not delivered yet
› Delivery incomplete
› Deliver without costumer acceptance

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FRAUD
› Definition:
› Intentional misrepresentation of facts
› Causes injury or damage to another party
› Fraud is the ultimate unethical act in business

› Why fraud:
à Perpetrators gain short-term economic gain
› Other incur economic losses the may outstrip the gain of fraudsters

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TYPES OF FRAUD
Misappropriation of Fraudulent financial
assets reporting
• Employees steal assets • Managers make false
from the company entries so the company
• Cash (cover it up through appears more profitable
erroneous entries in the
books) • Deceives investors and
• Inventory creditors
• False expense reports

• Employees can act alone or

in collusion See examples...

Both of these types of fraud involve making false or misleading entries in the
books of the company. We call this “cooking the books”.
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 FRAUD
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Big examples:
•1985: Enron created in by merging 2 gas companies in Huston, TX
•1999: Enron launces its broadband services and Enron online
•August 2000: Enron shares reached an all-time high of 90$ and
became the 6th largest company

• Nov. 2001: Enron announces false

reports of earnings of from 1997-
2001 by 600mln $, fake sales and
overstating assets
• Dec 2001: Enron files for bankruptcy,
largest in US history at the time

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 FRAUD
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• Jan 2002: Dep. of Justice begins investigation

• Jan 25th, 2002: Enron vice-president Cliff Baxter was found dead in a
car with a suicide letter

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 FRAUD
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• Jan 10th, 2002: Enron’s accounting firm A. Andersen claims that its
employees destroyed Enron’s documents, and D. Duncan exercised
the 5th amendment to not incriminate himself
• June 2002: Skilling and Lay are found guilty of 25 different counts of
fraud. Lay dies right before the sentence.

• Enron scandal:
http://www.youtube.com/watch?v
=Mi2O1bH8pvw
• Summary of Enron story:
http://www.youtube.com/watch?v
=stwcqdk7C_w

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FRAUD
http://www.youtube.com/watch?v=7g_d-
phoUrU&list=PLIdnCp7Wq62Nv7l3xGYxQ8eA2tL_seD1V&index=1

Big examples:
›WorldCom (2002) – reported expenses as asset and
overstated both profit and asset
àwhen discovered: company collapsed

›Who guards the guardians?

›Internal accounting company: Arthur Andersen approved all
the balances! à forced to close its doors as well in 2002

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FRAUD TRIANGLE

• Need
Motive • Greed

Opportunity Rationalization
• weak • distorted
internal thinking
controls
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