A Set of Financial Statement

The company president has asked to prepare a set of financial statement that portrays the company’s performance as being mediocre at best. This was required as the labor leaders were asking to give an average annual raise of 12%. The president has also made it clear that she wants a proper financial statement not a fraudulent financial statement. While preparing the financial statement the manager can come up with few ideas that will help to decrease the net income. The manager can make few changes while estimating the bad debts. Estimating bad debts is a management vision or estimation which depends on the past experience with the clients. Random change in the percentage used for estimating bad debts from 1.5% to 2% may result fraudulent practice. But if it is backed up by proper reasons then it shall be proper. If this is done, this will help them to show net income on the lower side. Another idea that the manager can come up is to elect the use of LIFO method of evaluating inventory. LIFO gives a conceptually better measure of income. In LIFO the cost of goods sold is highest; as a result the net income is lowest. Another ways is that, the manager can change the average estimated salvage value of long-term assets from 15% to 10% of historical cost. Average estimation of salvage value is totally management estimation, as it is the approximate value at the end of the useful life. If the salvage value is under estimated, then during the actual sale of the asset at the end of the period will result in higher profits. But change in the average estimated value of long term assets will increase the depreciation value and in turn decreases the net income. Other way of decreasing the net income is change in the depreciation method from straight line to an accelerated method. In straight-line depreciation method the cost of an asset is allocated equally over the period of an asset’s estimated useful life (Definition). Accelerated depreciation method is merely a way