Case Scenario:
Yoda Jones, controller for the Jedi Company, 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. He does not want to highlight the losses since he feels that will reflect poorly on him and on 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.
Question 1: What are the ethical issues involved in this case? Are they accounting related, finance related? Both?
Question 2: What do you think Yoda should do? (What would you do?)
Question 3: If Yoda decides to report the losses along with the company's expenses, how with this impact the bottom line?
Question 4: Is Yoda following GAAP? Why or why not?
Question 5: As an auditor or investor, should you be concerned about Yoda's decision?