Accrual accounting and debt payments In the 1990s, some of Poland’s fastest growing companies were former foreign trade organisations

(FTOs) which turned themselves into conglomerates. Keeping control of the finances of their subsidiaries proved a difficult task for top management. The chairman of one FTO/conglomerate, Universal, told The Economist (5 August 1995) that a subsidiary was able to show a profit in a period only because it skipped debt payments.

Required Is the chairman’s statement (as reported) correct? What is the effect on a firm’s accounts if it fails to make scheduled debt payments?

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