Question

BB is an accounting manager for a waste company. They are having a bad year financially are expected to have a net loss. A new leader is hired and suggests that the company write off 25% of its trucks. BB states the trucks are good for 2 to 3 years. The leader states it doesn't matter as now one will buy them anyway and writing them off will help next years financials look better. Please answer the following

How will the write-off affect the following year's return on assets ratio?

How will the write-off affect the asset and income growth percentages?

Explain how the components of the fraud triangle relate to this case?

Answer 1

The effect of writing off the trucks on the return on assets ratio is as follows

Due to writing of the trucks by 25% there is a decrease of assets and also increase in income in profit and loss account.

This situation leads to increase in return on assets ratio.

Calculation of return on assets ratio the denominator of assets will decrease and return on the investment on the numerator will increase. As mathematically decreasing denominator and increasing numerator will increase the resulting ratio. So by the given base we can conclude that turnover ratio will be increased why the writing off 25% of trucks.

Writing off will affect the the asset and income growth percentage as as follows :-

Writing off used to decrease in total assets value of the company so it effects assets to decline its value.

Writing of these assets in the form of sale of assets will increase the income of the company this leads to trace in percentage of income generated by the company in the current year.

explanation of all the components of a triangle is related to this writing off event

Components of a triangle

1. Pressure

In the given gas the newly appointed leader as a project fund management to bring a change in financial statements of the organisation all of a sudden.

Oppurtunity

The new leader has an opportunity to write off the companies trucks. Due to availability of this opportunity only the leader has commited to this fraud.

Rationalization

Here leader has rationalized there decisions and made dishonest decisions to get unjustified and fraudulent reporting to make financial statements better than actual.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.