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Sir, i have a problem in understanding “sale and buy back”. Can you explain to me with an example.I would really appreciate your help.
Are we looking here at an entity thats ells substantial amounts of inventory shortly before the financial year end and then re-purchases that same inventory shortly after the year end?
The substance of the transaction is that it isn’t in fact a sale. It’s a secured loan being taken by the company, possibly with the intention of manipulating the figures to be reported in the financial statements (increase revenue, decrease closing inventory, increase balance of cash in the bank)
If an auditor or reporting accounting sees this window-dressing activity, management will be advised to “undo” that double entry (of Dr Cash Cr Revenue and correspondingly increase closing inventory in Cost of Sales and Current Assets) and replace it with the correct entry Dr Cash Cr Loan
Better?
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