ASIA BUSINESS FEBRUARY 17, 2012 Tokyo Makes Arrests in Olympus Scandal By KANA INAGAKI

1. ASIA BUSINESS FEBRUARY 17, 2012 Tokyo Makes Arrests in Olympus Scandal By KANA INAGAKI TOKYO—Tokyo prosecutors on Thursday arrested three former Olympus Corp. executives, including former Chairman Tsuyoshi Kikukawa, and a former broker who worked for Olympus over their alleged role in the company's $1.5 billion loss-hiding scheme, one of Japan's biggest-ever corporate scandals.

2. Adjustments, Financial Statements, and the Quality of Earnings Chapter 4

3. LEARNING OBJECTIVES 1 through 5, no EPS or SCF

4. It’s a cruel world. It’s accrual world.

5. Accounting Cycle During the period: • Analyze transactions. • Record journal entries. • Post amounts to general ledger. Start of Period • Close revenues, gains, expenses, and losses to Retained Earnings. • Prepare financial statements. • Disseminate statements to users. At the end of the period: • Adjust revenues and expenses.

6. Purpose of Adjustments Revenues are recorded when earned. Expenses are recorded when incurred. Matching Principle Because transactions occur over time, ADJUSTMENTS are required at the end of each fiscal period to get the revenues and expenses into the “right” period.

7. There are four types of adjustments. Expenses Revenues Prepaid Expenses. Accrued Expenses. Unearned Revenues. Accrued Revenues. Types of Adjustments

8. Unadjusted Trial Balance • A listing of individual accounts, usually in financial statement order. • Ending debit or credit balances are listed in two separate columns. • Total debit account balances shouldequal total credit account balances.

9. Note that total debits = total credits

10. Accumulated depreciation is a contra-asset account. It is directly related to an asset account but has the opposite balance.

11. Cost - Accumulated depreciation = BOOK VALUE.

12. Cash received. Revenues earned. Unearned Revenues End of accounting period. Example includes rent received in advance (an unearned revenue).

13. On December 1, 2009, Tom’s Rentals received a check for $3,000, for the first four months’ rent from a new tenant. The adjustment on December 31, 2009, to reduce the liability and record the revenue earned would be: Unearned Revenues $3,000 × 1/4 = $750 per month.

14. After we post the entry to the T-accounts, the account balances look like this: Unearned Rent Revenue Rent Revenue 12/31 750 12/1 3000 12/31 750 Bal. 2,250 Bal. 750 Unearned Revenues

15. Revenues earned Cash received Accrued Revenue End of accounting period. Example includes interest earned during the period (accrued revenue).

16. At December 31st, Matrix, Inc. earned, but has not received, interest on its money market account of $150. The adjustment is made to debit Interest Receivable and credit Interest Revenue. Interest Receivable Interest Revenue 12/31 150 12/31 150 Bal. 150 Bal. 150 Accrued Revenue

17. Recognizing the Unrecognizable Joe Basile, Bingham McCutchen LLP Revenue recognition has perennially been one of the hottest of the SEC’s buttons, but perhaps never more so than now. During the past year the Commission has mounted high-profile investigations of such brand name companies as Xerox, Lucent and K-Mart, as well as several energy and telecommunication companies. SEC staff members have also recently said that the Commission will conduct a sweeping investigation into revenue recognition practices across a range of industries.

18. Cash paid. Prepaid Expenses End of accounting period. Expense incurred. Examples include prepaid rent, advertising, and insurance.

19. On January 1, 2009, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period.At December 31st, Matrix must recognize the portion of the insurance that has been consumed and becomes an expense. Prepaid Expenses $3,600 × 1/3 = $1,200 per year.

20. After we post the entry to the T-accounts, the account balances look like this. Prepaid Insurance Expense Insurance Expense 1/1 3,600 12/31 1,200 12/31 1,200 Bal. 2,400 Bal. 1,200 Prepaid Expenses Remaining two years of insuranceat $1,200 per year.

21. Expense incurred. Accrued Expenses End of accounting period. Expense paid. Examples include accrued rent, accrued interest, and accrued wages.

22. As of 12/27/09, Denton, Inc. had already paid $1,900,000 in wages for the year. Denton pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. The employees have earned total wages of $50,000 for Monday through Wednesday of the week ending 1/02/10. Accrued Expenses

23. After we post the entry to the T-accounts, the account balances look like this. Wages Expense Wages Payable As of 12/27 12/31 50,000 $1,900,000 12/31 50,000 Bal. 50,000 Bal. $1,950,000 Accrued Expenses

24. Accrued Expenses Involving Estimates • Certain circumstances require adjusting entries to record accounting estimates. • Examples include . . . • Depreciation • Bad debts • Income taxes

25. The next step in the accounting cycle is to prepare the financial statements. Income statement, Statement of stockholders’ equity, Balance sheet, and Statement of cash flows. Preparing Financial Statements

26. Decrease Increase NET INCOME = – REVENUES EXPENSES Financial Statement Relationships Net incomeincreases retained earnings (a net loss decreases retained earnings).Dividendsdecrease retained earnings. The income statement is created first by determining the difference between revenues and expenses. RETAINED EARNINGS DIVIDENDS

27. Increase Increase NET INCOME = – REVENUES EXPENSES Financial Statement Relationships Contributed Capital and Retained Earnings make up Stockholders’ Equity. STOCKHOLDERS’ EQUITY CONTRIBUTED CAPITAL RETAINED EARNINGS

28. STOCKHOLDERS’ EQUITY = + ASSETS LIABILITIES Increase Increase NET INCOME = – REVENUES EXPENSES Financial Statement Relationships STOCKHOLDERS’ EQUITY CONTRIBUTED CAPITAL RETAINED EARNINGS

29. The income statement contains revenues and expenses. Earnings Per Share (EPS) must be reported on the income statement.