Question

Charlie Brown, controller for the 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 extraordinary. 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. What are the ethical issues involved? Who are the stakeholders involved and state how the stakeholders would be affected by the course of action order by Charlie brown. Explain why you believe the course of action proposed by Charlie Brown is ethical or unethical. Explain the proper accounting treatment and support your answer with appropriate authoritative citation.

Answer 1

Ans)

The income statement is the repot that measures the success of a company’s operations for a given year. When it comes to the market a relationship of trust should always be maintained between the shareholders and the company. By Brown increasing depreciation, the total assets on the balance sheet will be reduced, which can lead to other negative effects on other financial statements such as the balance sheet. His poor earnings management actions affect the quality of earnings, which can result in the prediction of future of earnings to be distorted. By doing this he jeopardizes the trust between the company and its shareholders and undermines the reliability  of the financial statements for that company.

Since the loss is not unusual or extraordinary and is material in the amount, Brown should instead disclose the loss on the equipment in the non-operating section on the income statement as loss on equipment.