Question

Cascade company owns bonds that mature in 7 years; the principal from these bonds is intended for the remodeling of Cascade’s corporate offices. In years past, these bonds have been classified as Held-to-maturity because of Cascade’s strong financial liquidity and intention to use the principle for remodeling.

Cascade company has strong financial liquidity and equity funding however their current financial earnings are below analyst forecast. The CEO has recently emphasized the importance of meeting the earnings target for the year and has put considerable pressure on the accounting department to meet earnings expectations.

Questions:

1. How might the accounting department manipulate the accounting treatment of the bonds to improve the financial earnings of the company?
2. Which financial statement line items or financial ratios could an investor look at to identify potential manipulations of the financial statements?

Answer 1

As said in the question the CEO makes some pressure to the accounting department to meet the earnings expectations.

1. The accounting department manipulates the earnings of the company in the view of the bonds are

2. As said in the question the bo ds are classified as held to maturity then the account g departments represent them as they are held for maturity the interest amount on bonds will be paid at the time of maturity and the amount for which is kept aside for payment of interest will be shown as income and increase the earnings of the company.

3. The investor looks after some ratios as follows.

A. Debt - equity ratio

B. Interest coverage ratio

C. Asset turn over ratio.

D. Debt service ratio.

E. Gross profit ratio.

F. Net profit ratio.

All these ratios are studies by investor to get a clarity about organization and to find if there is any frauds or window dressing is done in books of accounts .

All these ratios are interrelated to each other if organization male any manipulation in one ratio it should be make in all ratios so the investor interrelates and finds the genuinty of organization.

These are the all information studied by the investors if any one has deep knowledge about accounts they will study about all items in financial statements of the organisation .

I hope, all the information given by me is useful to you.

Thank you.