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Ethics of GAAP

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, ...