Accounting Deals with Internal and External Users

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Accounting deals with internal and external users. External users are the investors, customers, suppliers, employees, authorities, and creditors that use the information about the firm to make decisions regarding their future relationship with that firm. The information that they look at to make these decisions are the financial statements. Each of these external users may use the financial statements differently. An investor may look to see if it is worth investing in that specific company; while a supplier may look to see if they should do business with that specific company. The internal users of that firm prepare and report the financial statements that the external users use to make their decisions. The single most important thing that firms show on their financial statement is earnings. Earnings are the amount of profit that a firm or company makes during a period. The value of a company and its earnings go hand in hand. Higher earnings means increased value for the company and lower earnings mean a decreased value for the company. Also, if companies have continuous growth in earnings then that would result in higher stock prices. Investors will look at the earnings of a company to decide which particular stock that they would want to invest in. Since earnings are the most important thing that companies show on their financial statements, many companies undertake earnings management. Earnings management refers to the strategy that companies use to manipulate their earnings so that they can change their reported earnings on the financial statements (Investopedia). It is very hard for companies to continuously report consistent periodic earnings because of economic cycles and seasonal changes. Since it is hard t... ... middle of paper ... ...as declining, WorldCom showed false growth and profitability so that they could increase the price of their stock. They were able to do this in two different ways. First of all, they underreported line costs. Line costs are the interconnection expenses with other telecommunication companies. Secondly, WorldCom was able to increase their revenue by creating fake accounting entries. These accounting entries were corporate unallocated revenue accounts. After the internal audit department at WorldCom found some of the fraud that was being committed, the Securities and Exchange Commission launched an investigation soon after. It was soon estimated that WorldCom’s assets were inflated by 11 billion. (WorldCom scandal) The CEO Bernard Ebbers ended up getting convicted of fraud and was sentenced to 25 years in prison, while WorldCom ended up filing for bankruptcy.
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