During a specific accounting period, a hospital has earned $1,500,000 in revenues and consumed $600,000 in resources. Consider the following three scenarios. In scenarios A and B, cash basis of accounting method is followed. In scenario C, accrual basis of accounting rules are followed.
Scenario A - management wants the financial statements to show high profit, it delays paying the bills until after the accounting period, although full payment of $1,500,000 is collected.
Scenario B - management wants the financial statements to show low profit, maybe in order to encourage donations. It discourages patients and third party payors from paying until after the accounting period. All the bills, $600,000, get paid on time.
Scenario C - according to accrual basis of accounting method, the financial statements report revenues, $1,500,000, when revenues are earned; and expenses expended to generate those revenues of $600,000, when resources are used.
Scenario A $1,500,000
Scenario B $0
Scenario C $1,500,000
Scenario A $0
Scenario B $600,000
Scenario C $600,000
Scenario A $1,500,000
Scenario B ($600,000)
Scenario C $900,000
1.Discuss how the cash basis of accounting is vulnerable to management's manipulation and how the accrual basis of accounting overcomes the disadvantages of the cash basis of accounting.
2.When looking at a capital investment into a project for an organization, management needs the board's approval for the funds. Because of this need for approval, there is sometimes a tendency to overstate revenue and understate expenses associated with the project. Why do you feel that management would overstate revenue and understate expenses? What are the consequences of doing this?
Please provide references and a min of 250 + words.© BrainMass Inc. brainmass.com October 10, 2019, 8:11 am ad1c9bdddf
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Discuss how the cash basis of accounting is vulnerable to management's manipulation and how the accrual basis of accounting overcomes the disadvantages of the cash basis of accounting.
Cash basis Accounting-refers to an accounting system where transactions are only recorded in the company books when cash for services rendered or products supplied is received or when cash actually changes hands. It does not match revenues earned with money laid out for expenses. This can be a problem a company buys products in one month and sells those products in another month.
Accrual basis accounting refers to an accounting system where transactions are recorded into the company books at the time when they occur irrespective of whether cash exchanges hands or not. In other words when a service is provided or a product is sold, it is immediately recorded no matter whether it has been prepaid, is paid for immediately or payment will be made in future. Accrual accounting ...
The two key accounting method of cash basis of accounting and the accrual basis of accounting can serve as checks and balances for each other ashtye have differing vulnerabilities, disadvantages and strengths.
It is important for company boards looking at making capital investment into projects to exercise caution when reviewing recommendations from managers as manipulation is not only widespread but problematic as reliance on audtiors may be riddled with conflict of interest.
The consequences of accounts manipulation can be far reaching.
This solution provides a guide in point form for students to think through as they prepare a narrative to address the questions raised above.