Accounting - Parmalat Several Accounts

Accounting - Parmalat Several accounts are affected by double billing. The revenue account receives two entries, and in all likelihood so does the accounts receivable. How this affects the finished inventory account depends if the entire transaction was recorded, or just the revenue side. If the former, the inventory account would deplete twice as fast. This would be easy to spot because the finished inventory might go to a negative number. The latter would be easy to spot because the accounts would be unbalanced.

At some point, the account is either settled, allowing Parmalat to collect double the cash it was supposed to, or the amount ends up in the bad debts account (or allowance for bad debts, whatever name the company uses). This would be higher than it should have been. But the most important thing is that double-billing increases revenue and accounts receivable, to the benefit of both the income statement and the balance sheet.

The supermarket billings helped Parmalat to obtain financing from Citigroup, because those billings would have showed on the balance sheet as accounts receivable. Accounts receivable are sometimes used as collateral to obtain debt. In this case, the accounts receivable would have been overstated, leading Citigroup to think that this was higher than it actually was. Thus, the company would have appeared more liquid than it was, and the bank would have financed against an asset that did not exist (or was half the size).

Note that the fact it was supermarkets was important, because banks would only use receivables as collateral if they were for reliable customers, of which supermarkets typically qualify. 3. Parmalat was declared insolvent because the company did not have the assets it said it had. In this case, it was a $4.9 billion bank account. However, credit would have been granted against an asset like that. Finding such an account did not exist, banks would have wanted their money back, and Parmalat would not have had it.

This would be grounds to take the company into insolvency, especially if somebody at Parmalat was counting on that account to pay off its debts. 4. These fraudulent activities, as noted, would have boosted the accounts receivable at Parmalat, and could potentially have reduced the inventories as well. The effect on the balance sheet, if the inventories were not affected, would have been to boost the a/R and therefore the current assets. As a result, the quick ratio would have improved, on the basis of an inflated accounts receivable. 5.

Citicorp was a victim here. There are some controls that can be done to ensure that the financial statements are accurate, but ultimately the bank had no reason to expect.