Public Policy Pharmaceutical Industry

Question: Discuss about the Public Policy for Pharmaceutical Industry. Answer: Introduction: The use of professional judgment in the adoption of policies and measurements are vital for preparation of the financial statement. It is important to exercise a degree of caution for determining the actual assets and income which are not overstated whereas expenses and liabilities are not understated (Almandoz and Tilcsik 2015). Generally, an accounting transaction is recognized when an entity obtains services or goods. In other words, the transaction is recognized as an expense or liability when cash is being settled. However the profit often overstated when entity finds difficult to encounter the possible obligations whose existence may be observed from the unfavorable economic conditions but their amount cannot be measured reliably or settlement is not probable. Thus contingent liabilities are not recognized which may be the potential cause of the overstated profits because an accountant failed to take into account the probable expenses while recording the list of operational act ivities. By overstating inventory, on the other hand, the company can inflate the cost of inventory (Devi 2015). This indicates that the actual cost is below the ascertained value. While perpetual inventory method, it is very difficult to monitor the tracking movements and thus the losses in inventory does not detect. Thus, the company may suffer overstating inventory at the end of the reporting period by the associated cost of lost inventory. There are other ways way in which the potential future environment impact of production and thus, overstate inventory leads to profits being overstated. Based on the given approach, the overstating of the profits is often done in order to compensate with the future liabilities, which may need to be sorted for the company. Hence, in this case the overstating of the profit of the company has been directly seen with the relevance of the accounting of the future liabilities. The different type of the other factors, which has led to the overstating of the profit, has been evident in form of the liabilities, which might occur from the future warranty costs. The main implication on the overstating of the profits of the company has been seen in form of taking into account the full cost related to the various types of the operational activities of the business. The rationale for this has been further seen in terms of the benefits related to cover the potential environmental impact (Rassier 2016). It might be possible that due to economic crisis there, the company is facing production crunch, hence the overstatement of the profits will act as a lucrative option for the investors even during the situation of economic downturn. In several cases, the companies are seen to be negligent on part of taking into account the various types of the cost related to the operational activities. This is also directly relevant to the different types of the manufacturing and the production activities taken by the company. As the profits are overstated the company will be automatically be able to compensate for the inclusion of these costs (Lexchin 2016). It is noteworthy to denote that if the corporation overstates its profit it will also lead to the overstatement of gross profit and net income. Along with this, current assets, retained earnings, total assets and equity of stockholder are all related to the financial ratios. Overstatement of the gross profit and net income leads to the overstatement of the inventory and then not enough of the cost of goods sold are available. It is worth mentioning that the higher the amount of the net income represents that the reported amount of retained earnings and stockholders equity is also high (Deegan 2013). Therefore, the overstated amount of the inventory after the end of the financial year turns into the beginning inventory in the following financial year. In the following year the period of cost of goods sold will also be high and will ultimately lead to lower reporting of the gross profit and net income. However, the retained earnings and the other balance sheet amounts will be corrected at the end of the second reporting period. When it is found that the reported amount is overstated it represents that the financial amount reported is incorrect and the amount reported by the company is more than the true or correct amount (Nobes 2014). It is important to denote that management teams often take accounting estimates that are subjected to several incentives. This could lead them to overstatement of the financial performance as an overstated financial accounting statement could help in avoiding the negative consequences of reporting poor performance. References Almandoz, J. and Tilcsik, A., 2015. When experts become liabilities: Domain experts on boards and organizational failure. Academy of Management Journal, pp.amj-2013. Deegan, C., 2013.Financial accounting theory. McGraw-Hill Education Australia. Devi, R.U., 2015. Creative accounting practices-Its Pros Cons: An analysis. International Journal of Management, IT and Engineering, 5(1), pp.40-52. Lexchin, J., 2016.Private Profits versus Public Policy: The Pharmaceutical Industry and the Canadian State. University of Toronto Press. Nobes, C., 2014.International Classification of Financial Reporting 3e. Routledge. Rassier, D.G., 2016. Fair Value Accounting and Measures of US Corporate Profits for Financial Institutions.