Financial Statement : The Balance Sheet

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Financial Statement Relationships Separately, the balance sheet reports a company’s financial position while the income statement reports a company’s fiscal year profits and losses. The balance sheet measures a company’s financial position by reporting its assets, liabilities, and owner’s (shareholder’s) equity. The income statement measures a company’s financial performance by reporting its revenues, expenses, and net income/loss. When combined, they serve two vital purposes: (1) expand the accounting equation and (2) enable analysis using ratios to determine industry position or potential material misstatements. The increase or decrease in owner’s (shareholder’s) equity on the balance sheet is a direct result of the net…show more content…
Therefore, the company utilized 4.37% of its assets in 2000, but decreased to 1.48% in 2001 to earn net income of $4,153,000,000 and $1,501,000,000 respectively. The 2.89% decrease between the two years shows that the company did not utilize its assets as effectively as they could have (WorldCom 10-K 2002) (Rufus, Miller, & Hahn 2015) (Sherman 2016). Fraud Hypothesis Potential

After completing both vertical and ratio analyses, there is potential evidence to substantiate the need for a fraud hypothesis. Out of the five financial relationships that could lead to fraud, the relationship in question for WorldCom’s financial statements is Assets versus Liabilities. It is customary that companies maintain a balance between what they own and what they owe. However, a shift in the balance in either direction could result from a change in company policy or fraud. Overall, WorldCom’s Debt to Assets’ ratio is relatively stable with a slight increase of 1.69% from 2000’s 40.55% to 2001’s 42.24%. However, the decrease in the Current Liabilities account from $17,673,000,000 in 2000 to $9,210,000,000 in 2001 results in a 52% drop in Total Current Liabilities. The source of the significant drop is the $7,028,000,000 decrease in Short-Term Debt and Current Maturities of Long-Term Debt. There is a possibility that WorldCom paid off these debts, but there is also the possibility that WorldCom wrote them off. Current Ratio, Acid Test, and Net Working
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