You are a recently-hired accountant at Greenwood Company, a small corporation th

Question

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.

Explanation / Answer

Argument of the controller is wrong. If repair and maintenance of $140,000 is reported as expenses, the net income will be reduced by that amount.

Accounting statements must be true and fair. All the material facts should be properly disclosed. Otherwise the interested parties like investors, creditors would be misguided. They may take a wrong decisison after seeing such manipulated net income.

The controller doesn't want to change his net income in the quarter. That is why he wants to recorded such expense as an asset value. This is against the ethic too.   

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