Question

The manager of ABC Company bought 50 trucks for the business use. When he recorded the trucks, he doubled the estimated life of the trucks. The second year he increased the residual value. Requirements 1. Explain why he doubled the estimated life in the first year. 2. Explain why he increased the residual value. 3. Discuss the GAAP issues of each of the above 4. Discuss the ethical issue of each of the above

each requirement with at least 5 complete grammatically correct sentences.

Answer 1

1. The manager of ABC company has doubled the estimated life in the first year so that lesser depreciation costs are reported in income statement, which eventually would inflate the profits. He might be doing so to influence the potential investors by creating a facade of success.

For a lot of investors, book value or net asset value (NAV), offers a relatively precise and unbiased valuation benchmark.

But again, Management's choice of depreciation method can also significantly impact book value.

2. There's the issue with the scrap value as well that the Manager of ABC Company chose. We can see the reason behind Manager's decision: The longer the useful life of an asset and the greater the scrap value, the less its depreciation will be over its life. And a lower depreciation raises reported earnings and boosts book value. Manager's contentious assumptions will improve the appearance of its fundamentals.

3. GAAP depreciation methods are a unique combination of principles and procedures provided by policy boards to accountants to help consistency and compliance.

A closer look at depreciation should remind investors that improvements in earnings per share and net asset values that are boosted thanks to the choice of depreciation assumptions have nothing to do with improved business performance. They don't always signal strong long-term fundamentals.

According to GAAP, The asset’s lifetime and residual value are likely to be estimates. This is because all pieces of equipment have minor differences, uses may change over time and human error might introduce a break or flaw that was not considered. The manufacturer of the equipment should be able to help predict lifetime, and if similar equipment has been used in a facility before, that can be taken into consideration.

It’s just important to note the rationale and logic used to approach the situation and the technical knowledge used to decide on reasonable estimates for the asset.

4. Accounting ethics is concerned with how good and moral decisions can be made about the planning, reporting and disclosure of financial information.

Over the last two decades most accounting controversies have focused on fraudulent financial reporting. This is generally done with the intention of misleading investors and maintaining the share price of the company.

While the benefits of false financial reporting can in the short term raise the stock price of the company, in the long   run there are almost always ill effects. This short term emphasis on corporate finances is sometimes referred to as "myopic management."

Disclosure violations are errors of ethical omission. Thus deliberately documenting transactions in a manner that does not adhere to generally accepted accounting principles is considered fraudulent financial reporting, failure to disclose details to investors that might affect their investment decisions in the business could also be considered fraudulent financial reporting.

Company executives have to walk a fine line; preserving the proprietary information of the business is vital to the management. Nevertheless, if this information relates to a significant event, withholding the information from investors may not be ethical.