In order to monitor and control its operations, your company prepares monthly financial statements. An executive meeting is held in the latter part of each month to review the previous month's statements and discuss the company's progress.
A new member of the executive team asks why these meetings are not held at the beginning of each month. The chief financial officer (CFO) replies that, because of the adjustments that have to be made, the financial statements are not ready until near the middle of the month. This prompts someone to ask, "Is it really necessary to make adjustments every month? Couldn't the process be simplified and sped up by only making adjustments for the year-end statements? After all, the monthly financial statements are only used internally, for management control purposes; only the year-end statements are used externally and therefore have to conform with financial reporting standards."
The CFO asks you to prepare a response to these questions with a brief discussion of the shortcomings of unadjusted financial statements, including the reliability of the results and the possibility of manipulation.