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uk

Interpreting Company
Accounts

Copyright 2006 – Biz/ed


http://www.bized.co.uk

Interpreting Company
Interpreting Company Accounts
Accounts

Copyright 2006 – Biz/ed


http://www.bized.co.uk

Window Dressing

Copyright 2006 – Biz/ed


http://www.bized.co.uk

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


http://www.bized.co.uk

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

Copyright 2006 – Biz/ed


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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

Copyright 2006 – Biz/ed


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Depreciation
• Take the machine here:
– 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?
Mill Drill Machine Copyright: Kenn Kiser, – What would it cost to replace
http://www.sxc.hu after 5 years?

Copyright 2006 – Biz/ed


http://www.bized.co.uk

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

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