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Financial accounting theories in a real life - Assignment Example

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Financial accounting theories in a real life

It is used to communicate various aspects of the business. There are diverse kinds of theories that prevail in financial accounting. It has been observed that there prevails no accounting theory which is a universally accepted theory of financial accounting. Different researchers have dissimilar views regarding financial accounting theories (McGraw-Hill, 2006). There are different types of accounting theories that can be implemented in real life scenario. One of them is the Repo 105 theory. This theory is used by many of the companies. Moreover, it needs to be mentioned that the misuse of such theories can result in negative functioning of the companies. There are many such cases where improper use of accounting theories result in complete demise of the companies. Financial regulations can play a major role in reducing such cases (Liu & Schaefer, 2011; Eisinger, 2012). The report intends to discuss the role of Repo 105 scheme in the enhanced performance and subsequent downfall of the Lehman Brothers. The report would further depict the different motives that encourage companies to manipulate their financial accounts with reference to a few well known cases. ...
of assets from one party to another which would also be accompanied by an agreement of repurchase of the same assets after a particular phase of time. After a certain period of time, the transferee returns the securities to the borrowers, which in turn repays the loan with a considerable interest. It needs to be mentioned that as a part of the exchange process, one party would receive securities as guarantee for the cash loaned, while the other party would receive cash guarantee for the securities loaned. It has been observed that these agreements are widely used as well as recognised as a legal means of providing short-term financing for liquidity needs. It has been further observed that the size of the repo market is quite vast and widespread and is estimated to be around US$12 trillion. It has been noticed that repos are also used by banks to borrow money from different companies that have additional cash reserves. In order to minimise the repayment risk, the banks transfer assets to lenders (i.e. companies) as part of security (Liu & Schaefer, 2011). The fall down of the Lehman Brothers in the year 2008 is amid the most critical moments in the financial world. Lehman Brothers were observed to have utilised Repo 105 scheme to show a better financial health to the outsiders. It has been analysed that Lehman Brothers had got into an agreement of repurchase with banks situated in the Cayman Islands. It has been further noted that within the deal, Lehman Brothers would be entrusted to sell toxic assets to other banks with the understanding that they would buy them after a particular period of time. It is worth mentioning in this context that this agreement or the repo trick depicted the financial health of the company to be much better in paper. It can be analysed that ...Show more

Summary

Financial Accounting Theories in a Real Life Table of Contents Table of Contents 2 Abstract 3 Introduction 4 Repo 105 and Its Impact 4 Motives of Firms behind Manipulating Their Earnings 6 Need for Financial Accounting Regulations to Prevent Accounting Scandals 8 Conclusion 10 10 References 11 Abstract The report has discussed about the impact of the current accounting cases to the financial world…
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