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Ethics of GAAP

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You are a recently-hired accountant at Greenwood Company, a small corporation that does a seasonal business of selling snow removal equipment, with most of its sales to retailers occurring in the last two quarters of the calendar year. Production is particularly heavy during the second quarter, in preparation for these sales.

In the process of preparing Greenwood Company's 2015's first quarter interim report, you noticed and inquired about an account titled Miscellaneous Factory Assets for $140,000. The controller asked you to include it in long-term assets although that was the amount spent on repairs and maintenance during the first quarter. The controller didn't want to show a loss, which is what would happen if the $140,000 were expensed in quarter 1. Instead, Greenwood would book the expense in the quarter it will have the least effect on net income. The controller argued that it makes no difference, since the company's total yearly income is the same regardless of the quarter repairs and maintenance expense is reported.

Respond to the controller's explanation from financial reporting and ethical perspectives.

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There are multiple GAAP principles that dictate when expenses must be recognized. Those GAAP principles are association cause and effect, ...

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Case 9.2 Departures from GAAP: Are They Ethical?

Martin Myers owns Myers Construction Co. The company maintains accounting records for the purposes of exercising control over its construction activities and meeting its reporting obligations regarding payrolls and income tax returns. As it has no other financial reporting obligations, Myers does not prepare formal financial statements.
The company owns land and several other assets with current market values well in excess of their historical costs. Martin Myers directs the company's accountant, Maureen O'Shaughnessey, to prepare a balance sheet in which assets are shown at estimated market values. Myers says this type of balance sheet will give him a better understanding of where the business stands. He also thinks it will be useful in obtaining bank loans, as loan applications always ask for the estimated market values of real estate owned.

Would the financial statements requested by Martin Myers be in conformity with generally accepted accounting principles?

Is Myers Construction under any legal or ethical obligation to prepare financial statements that do conform to generally accepted accounting principles?

Discuss any ethical issues that O'Shaughnessey should consider with respect to Myers's request.

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