Cooking the Books: Puffing up the Income Statement

Puffing up the Income Statement most often involves some form of bogus sales revenue that results in increased profit.

One of the simplest methods of cooking the books is padding the revenue; that is, recording sales before all the conditions required to complete a sale have occurred.  The purpose of this action is to inflate sales and associated profits.  A particularly creative technique is self-dealings such as increasing revenue by selling something to yourself.

Revenue is appropriately recorded ONLY after all these conditions are met:

1. An order has been received.
2. The actual product has been shipped.
3. There is little risk the customer will not accept the product.
4. No significant additional actions are required by the company.
5. Title has transferred and the purchaser recognizes his responsibility to pay.

The other common route to illegal reporting of increased profit is to lower expenses or to fiddle with costs.  A simple method to accomplish this deception involves shifting expenses from one period into another with the objective of reporting increased profits in the earlier period and hoping for the best in the later period.

Related:

• Cooking the Books: Why do managers cook the books?
• Cooking the Books: This is very different from "Creative Accounting"
• Cooking the Books: Puffing up the Income Statement
• Cooking the Books: Techniques to Puff Up the Income Statement
• Cooking the Books: Sweetening the Balance Sheet
• Cooking the Books: Techniques to Sweeten the Balance Sheet
• Cooking the Books: The Auditor's Job
• Cooking the Books: Investors, be warned.