Business Accounting

This paper seeks to describe how the people of Leslie Fay Companies committed or accomplished the major inventory frauds in 1993. This paper would involve explaining what journal entries were made or omitted, the effect of such entries or their omission in the balance sheet and the ratios, their effect on the income statement and how they will affect the later periods. This paper will also present theories as to why the fraud was committed, why the perpetrators imagined that they would avoid detection and the reason why they eventually confessed. 2. Analysis and Discussion 2. 1 What journal entries were made or omitted?As to the overstatement of the inventory as the first fraud , the scheme was to have the resulting physically count of inventory overstated as basis of recording. The entry to record ending inventory based on physical count at year is to debit Inventory account and credit Income and Expense Summary account. The accountant may have bloated or made double recording of items counted with corresponding cost. As to markdown allowance having been understated or omitted as the second fraud , the entry that was not made includes a debit to Inventory Write-down Account and a credit to Allowance for Inventory Write-down.Assuming these entries were made, the correct amounts were not reflected accordingly by understatement. As to suppliers’ invoices not having been recorded as the third fraud , the omitted entry was a debit Purchases account and a credit to Accounts Payable. As to the revenues and profits having been inflated by recording sales entries after the quarter had ended as the fourth fraud ,  a debit to debit Accounts Receivable or Other Assets accounts and a credit to Sales revenues were made. 2.2 What are the effects of such entries or their omission in the balance sheet and the ratios, their effect on the income statement and how they will affect the later periods? As to first fraud above where inventory was overstated, the effect is to increase the inventory account in the balance sheet, which is a part of the assets and to increase the gross profit in the income statement. The overstatement of the gross profit is a necessary effect of the understatement of cost of goods sold by overstating the inventory to be deducted from the goods available for sale in the income statement.The effect in the ratio by overstating inventory is to increase the net profit margin ratio. It would also increase the return to equity ratio because net income is increased. If said error is left untouched in the following year, the error would self-correct if the correct thing is done in the said year. As to the second fraud where markdown allowances were understated or omitted, the effect is to understate expenses in the income statement and therefore would increase net income. The effect in the balance sheet would be overstatement of the assets.The effect would be to increase net profit margin, return on assets and return on equity. The effect in the latter period is the same as the previous error, where a self-correction is possible. As to third fraud where suppliers’ invoices were not recorded, the effect would be to understate cost of goods sold and therefore overstate income. In the balance sheet, the effect would be to understate liabilities. This would overstate the profitability ratios such net profit margin, return on assets and return on equity.This would also overstate current ratio and understate debt to equity ratio. The error would continue to overstate retained earnings and understate liabilities until corrected in the latter period. As to the fourth fraud above, the income statement would reflect overstated income while the balance would reflect higher current assets and total assets. This would overstate the profitability ratios such net profit margin, and return on equity. This would also overstate current ratio and understate debt to asset ratio.The error would continue to overstate retained earnings and assets until corrected in the latter period 2. 3 What are the present theories as to why the fraud was committed and why the perpetrators imagined that they would be avoid detection and the reason why they eventually confessed? The frauds were committed because they were in violation of the revenue and expense recognition principles. They also violated the asset and liability recognition principles. Under the revenue recognition principles revenues should only be recognized when earned.Under the first fraud of overstating inventory and fourth fraud of deliberately overstating revenue, revenues recorded were not earned since they could not be supported by evidence in the records. The principles assume the presence of evidence of back up assertions hence if the same fails; a fraud is one of the greatest possibilities if an inadvertent error is not proven in audit. The second fraud of not recording or understating inventory write-down and the third fraud of understating purchases and liabilities are required under the accounting principles to be recognized as supported by evidence.Failure to do so is going against the evidence and going against the principles. The perpetrators imagined that they would avoid detection because they expect that management and investors would expect them to meet financial targets as influenced by the budget. The reason why they eventually confessed is that they could no longer withstand the overwhelming evidence of fraud against them which includes the industry situation as caused by the recession at the time. It was difficult to cover the shortfall with revenue from next quarter as sales dropped. The economic situation was not accordance with what they were trying to tell every body.Confession comes a result of not being able to contradict what is natural. Hence, confession to commission of crime is then just being consistent with nature when one has a conscience. 3. Conclusion One cannot contradict the law of nature. What is natural will reveal what is artificial. The perpetrators or those people of Leslie Fay Companies, who initially were successful in committing the fraud, could not simply continue to fool the stakeholders and higher management indefinitely by making it appear that they were meeting the target when the situation outside in the industry would not allow them.The natural of law of economics had indeed overtaken them. BIBLIOGRAPHY “The Leslie Fay Company, Inc. Business Information, Profile, and History”, Net Industries, LLC (2008). Online. Available from  http://companies. jrank. org/pages/4278/Leslie-Fay-Company-Inc. html, Accessed December 13, 2008 Case study:  Lesley Fay Cos. Peter Walton, et al. International Accounting. (London: Cengage Learning EMEA, 2003), 433 Weygandt, Jerry, et al. Hospitality Financial Accounting, (New Jersey: John Wiley and Sons, 2008), 38