Question

(Earnings Management) Charlie Brown, controller for Kelly Corporation, is preparing the company's income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets' lives, the losses would not be so great. Since depreciation is included among the company's operating expenses, he wants to report the losses along with the company's expenses, where he hopes it will not be noticed.

Instructions

a.  

What are the ethical issues involved?

b.  

What should Brown do?

Answer 1

Requirement a

The chief principled problem is that Charlie Brown would be deceitful just to exploit the company’s outcome. Investors opting to participate in this company could possibly be investing in a company that has no difficulty hiding significant financial information. Though it is very thought-provoking to always to conduct your financial reporting in an moral demeanor, it is more advantageous in the long run since then you will be a more dependable asset.

Requirement b

Individually if I was Mr. Brown, I would sit down with the proprietors of the company and let them know that I would reveal the evidence as a substantial loss. Then, in the impending, founded on the information that he has, find a precise depreciation rate that will be more exact. The best thing for him to do in the existing condition is to list the loss under infrequent gains or losses. According to our text, we “should show it in a separate section on our income statement, just above where extraordinary items would be placed, under the section called “Other expenses and losses”