Business Activity
GreenTech Energy is a medium-sized company specializing in renewable energy solutions, including solar panels and wind turbines. The company sells these products to both residential and commercial clients.
Financial Statements-Balance Sheet (in USD)
| Particulars | 2022 | 2021 |
| Assets | ||
| Non-current Assets | 5,000,000 | 4,000,000 |
| Current Assets | 2,000,000 | 1,500,000 |
| Total Assets | 7,000,000 | 5,500,000 |
| Liabilities | ||
| Non-current Liabilities | 1,000,000 | 800,000 |
| Current Liabilities | 1,500,000 | 1,200,000 |
| Total Liabilities | 2,500,000 | 2,000,000 |
| Equity | ||
| Common Stock | 4,000,000 | 3,000,000 |
| Retained Earnings | 500,000 | 500,000 |
| Total Equity | 4,500,000 | 3,500,000 |
| Particulars | 2022 | 2021 ( below line) |
| Revenue | 6,000,000 | 5,000,000 |
| Operating Expenses | 4,500,000 | 4,000,000 |
| Net Profit | 1,500,000 | 1,000,000 |
Financial Year 2022
- · Non-current Assets: The non-current assets of $5,000,000 include solar panels and wind turbines. The increase in valuation is attributed to “technological upgrades,” but no third-party valuation has been conducted.
- · Current Assets: The current assets of $2,000,000 include cash, accounts receivable, and inventory. The increase is mainly due to a rise in accounts receivable.
- · Non-current Liabilities: The non-current liabilities of $1,000,000 are long-term loans. No off-the-books financing is recorded.
- · Current Liabilities: The current liabilities of $1,500,000 include short-term loans and accounts payable.
- · Equity: The equity includes common stock of $4,000,000 and retained earnings of $500,000. No additional shares were issued during the year.
- · Revenue: The revenue of $6,000,000 is generated from the sale of renewable energy solutions.
- · Operating Expenses: The operating expenses of $4,500,000 include cost of goods sold, salaries, and other overheads.
Financial Year 2021
- · Non-current Assets: The non-current assets of $4,000,000 include solar panels and wind turbines.
- · Current Assets: The current assets of $1,500,000 include cash, accounts receivable, and inventory.
- · Non-current Liabilities: The non-current liabilities of $800,000 are long-term loans.
- · Current Liabilities: The current liabilities of $1,200,000 include short-term loans and accounts payable.
- · Equity: The equity includes common stock of $3,000,000 and retained earnings of $500,000.
- · Revenue: The revenue of $5,000,000 is generated from the sale of renewable energy solutions.
- · Operating Expenses: The operating expenses of $4,000,000 include cost of goods sold, salaries, and other overheads.
Solution
a) How Did You Identify?
- · Off-the-Books Financing: The liabilities are significantly lower than the assets, and there is no corresponding increase in equity to justify the asset growth.
- · Inflated Asset Valuation: The non-current assets increased from $4,000,000 in 2021 to $5,000,000 in 2022 without a corresponding increase in revenue or net profit.
b) Implications
- · Financial Misrepresentation: Off-the-books financing and inflated assets can mislead investors and stakeholders.
- · Legal Risks: Both manipulations can lead to regulatory scrutiny and potential legal actions.
c) As Users of Financial Statements, How to Mitigate Such Risks?
- · Liability Verification: Scrutinize off-balance-sheet items and related party transactions.
- · Asset Valuation: Cross-verify the asset valuations with market rates and trends.