Financial Statements and Restatements

Capstone research project
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Financial statements are vital elements that provide critical information about a company financial health. Typically, financial statements are prepared based on the daily bookkeeping to help track the flow of funds and resources in an organization (Cheng et al., 2017). For instance, write-down inventory reduces the net income and the amount reported in the balance sheet for owners’ equity. Consequently, the information offered by the statements is vital as it help organization to benchmark as well as provide a feedback on the overall direction. Different stakeholders such as creditors, employers, government, shareholders and management depend on financial statements to make informed decisions. In the preparation of financial statements, most organizations use Internal Accounting Standards. Nevertheless, these standards do not provide for the discrete disclosures of write-downs in the income statement (Alali & Wang, 2017). For example, if the inventory write-downs are not included in the financial statements an investor might overvalue the performance of the organization leading to uninformed decision.
Usually, ethics in accounting focus on making better moral decisions in the preparation, presentation and disclosure of financial information. Inventory write-downs involve the reduction of an inventory value where the market values declines below the book value on the balance sheet. In normal operations business cannot avoid having stocked inventory unless it is operating under just- in-time approaches (Roscoe & Blome, 2019). As such an inventory lifespan gets to a point it is not sellable or it is entirely damaged or they are stolen. Under this circumstances, write-downs happens by either reducing the value of the inventory or removing the entirely. Inventory write-downs are an expense that reduces an organization net income and shareholders’ equity. Further, the inventory write-downs leads to decline on the value of inventory as well as the cost of goods available for sale at any particular period. In a nutshell, inventory write-downs affect both the income statement and the balance sheet. Usually, if the write-down is off insignificant value, it is accounted in the cost of goods sold; otherwise it is accounted in a separate impairment loss on the income statement where the stakeholders can access the impact of such items (Cheng et al., 2017). Failure to include the write-downs in the financial statements leads to inaccurate information to the stakeholders on the performance and financial position of the organization. As a result, the stakeholders may end up in making of uninformed decisions based on the provided data. For example, an organization income statement may portray a positive organization performance which might not be necessary true if the obsolete and damaged goods are omitted.
The civil tax fraud penalty applies to any underpayment of tax due to fraud. Normally, the penalty is computed based on the understatement (Lopresti, 2019). As partner in the accounting firm, part of the responsibility is update the chief financial officer on the impacts of internal revenue service (IRS) assessment. As the organization failed to expense or disclose the values of the stock options through its shared-based compensation plan in the financial statements, the IRS considers it as fraud focused reducing the tax payable.
Under this scenario, the organization will incur 75% of the under payment will be added to the outstanding balance. In case the organization will be unable to the settle the penalty within 21 days, additional of 0.5% will be charged each month on the late payments (Lopresti, 2019). Moreover, Internal Revenue Service (IRS) can refer the case to criminal prosecution. As such the chief finance officer and chief Executive officer maybe liable for the non-disclosure hence attracting substantial charges. Besides, if the IRS discloses other financial discrepancies and fraud, this can cause financial harm as most stakeholders such as investors may lose confidence with the company. However, the management can instill preventive measures such as keep the books of accounting well documented and organized, adopt a culture of matching all the cash flow and revenues as well as working with an audit tax accounting professional.
Inaccurate financial statement preparation, presentation and disclosure maybe as a result employee carelessness and dishonesty, lack of information as well as misinterpretation of data. Financial statements are the reflection of business performance therefore organization should maintain the statements to be error free. Incorrect statements not only provide inaccurate performance of a business, but also produces costly impacts when it comes to assessment, tax liability and profit margins (Alali & Wang, 2017). For instance, if the financial statements records low profit margins, the organization will be undervalued. Alternatively, if the profit margins are reported to be very high, the consequence will be high tax liability.
Typically, inaccurate presentation of financial statements may affect the stakeholders in the company especially if they uncover the inaccuracies. For example, the inaccurate financial statements will affect the company credibility to the potential investors. Moreover, flawed financial statements that leads to penalties, additional taxes and subsequent audits portrays negative business image to the stakeholders (Alali & Wang, 2017). In the scenario the stakeholders find the financial statements are flawed, they will lose the confidence of the management as well as the reliability of the financial statements. Moreover, with additional expenses due to penalties and additional taxes, the stakeholders particularly the investor’s return on the investment will also decline. On the other hand, inventory reserve reflects a reduction in the market value of a company’s inventory. The reserves helps cushion the financial statements incase if the larger than expected inventory losses due to damage are incurred. In a nutshell, the inventory reserve helps account for future business losses due to future inventory devaluation. If the inventory reserves are reduced, the organizations will incur larger losses due to decline inventory reserve that helps cover the losses. Consequently, these losses will lead to decline on the return on the investment to the stakeholders.
An organization inventory values plays a vital role in the taxable income. By writing off or writing down obsolete and unsellable inventory can help reduce tax bill. For tax purposes the United States allows the taxpayers to update the price of the stocks to the market prices. Organizations are required to amend the values in the same year when stocks price declines even if the goods are not yet sold. Section 446 and 471 of the internal revenue code of 1954 provides for the accounting for the inventory. While Section 446 allows for taxable income to be calculated under the normal method of accounting of the organization unless the method is not a reflection of the income, Section 471, the taxpayers can value their inventory through cost and lower of cost or market methods (Byzalov & Basu, 2016).
On the other hand, in the case “Thor Power Tool Company vs. Commissioner (1979)”, the supreme court of the United States upheld the Internal Revenue Service regulations that limited how the taxpayers could write-down inventory. The company manufactured tools and parts at its tool division. The organization also maintained inventories of the tools and parts, accessories, raw materials, work in progress at all branches of the tool division plants. When the organization halted the manufacture of a specific model, it sustained to stock part and accessories for the tools of this particular model that were already in service. Due to the excess, the organization started to amortize the cost of inventories as write-down inventories. Moreover, the organization on excess production, its accounting approaches was to write down the inventories on account of loss. On assessment, the Internal Revenue Service argued that it could only allow for write-down only on the occasion the taxpayer demonstrates a reduction in market price or the products are defective but not in the scenario that the company was unable to sell the products.
Currently, stock options have been the most overriding ...