Financial Statement Restatement
Financial Statement Restatement Whether a business is large or small does not exempt it from errors - Financial Statement Restatement introduction. The number of errors in financial statements has risen in publically held companies. When changes in accounting principles occur, companies need to be aware of these changes and make the necessary adjustments within the guidelines of the generally accepted accounting principles (GAAP). The effect of errors and changes on financial statements affects the stockholders and companies are put at risk of losing the trust and confidence of their financial statement users, investors, and customers.
Overstock. com is an example of a company with accounting errors that they announced in early 2009. Below is an overview of the issues that led to the recent restatement of Overstock. com’s financial statement. In October 2008, Overstock. com disclosed new customer credit and refund accounting errors and restated all financial statements from Q1 2003 to Q2 2008 to reflect a $12. 9 million decrease in revenue and a $10. 3 million increase in net loss (Kanaracus, 2008). Overstock. om announced a restatement of its financial statements because of a violation of GAAP for the second time in the past two years. Overstock. com restated the previous financial statements to rectify the company’s customer credit and refund errors. Partners of the Overstock. com were under billed because of an accounting error in 2008. Overstock. com chooses to record this entry inaccurately, which falsely increase revenue, causing them to record inaccurate profit in 2008.
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A number of accounting principles were violated in Overstock. com restatement of the year end 2008 financials. The first is revenue recognition principle, which states improper revenue accounting includes instances in which revenue was improperly recognized and questionable revenues were recognized or any other number of related errors that led to misreported revenue (Kieso, Weygandt, & Warfield, 2007). The partners of Overstock. com should have been billed in earlier periods.
The prior period statement should have been adjusted to show changes. Another principle violated was conservatism, which in accounting means, that when preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets or income (Kieso, Weygandt, & Warfield, 2007). Overstock. com’s restatement of financial reports announced in October 2008 wiped out earlier positive adjustments to income from rectifying its inventory accounting error.
The misclassification of transactions caused account receivable to project higher earnings in which restatement shows a drop going back to 2003 in revenue reported, operating loss, gross profit, loss from continuing operations, and net loss per share. The effect of net loss per share for the company stockholders is minor if they do not own a large percentage of stock. The larger effect will be trust and inconsistencies that make Overstock. com look dishonest. Overstock. om’s inability of its internal control over financial statements will affect the stockholder’s decisions to buy or sell its stock. Financial statements user depend on accurate financial reports from companies to make appropriate decisions to financial activities. On occasions, financial statement users find that the data they had depended on for decision-making was not accurate. The data presented must be accurate, verifiable, and reliable. Companies are required to restate financial statements and risk confidence and trust of the financial statement users.
Even until today Overstock. com has not been able to straighten out the issues entirely, which leads to speculation of deceptive management of accounting or auditing department. Reference Kanaracus, C. (2008, October). Update: Overstock. com restates earnings, cites ERP implementation. Retrieved from http://www. computerworld. com/s/article/9118205/Update_Overstock. com_restates_earnings_cites_ERP_implementation? intsrc=hm_list Kieso, D. E. , Weygandt, J. J. , & Warfield, T. D. (2007). Intermediate Accounting (12th ed. ). Hoboken, NJ: Wiley.