Respond to students response below. Hello all, The CFO\'s plan seems fairly logi

Question

Respond to students response below.

Hello all,

The CFO's plan seems fairly logical. Net income is derived from revenue minus expenses. If you reduce the expenses then you'll have more net income. Extending out the depreciation expense over 15 months will do just that. It will affect the net income in the following year as well. It will increase the depreciation expense that wouldn't have been there if the original 3 month plan had continued. This plan is allowed by GAAP. She is the boss and assesses the depreciation value of her assets. The bank relies on the financial statements to make decisions concerning the company. It's decision to approve and disapprove a loan may be affected by the CFO's decision to stretch out the depreciation expense. It would cause the company to show more net income and seem like a more secure investment for the bank. I would bring all the information to the lead accountant and allow them to make the decision.

Explanation / Answer

The decision of the CFO shouldn't be based on the criteria for getting the loan approved by the bank. The financial statements should be prepared in accordance with the accepted accounting principles and procedures. Overtstating/Understating expenses for the purposes of reporting higher/lower net income is not ethical as financial statements are expected to provide true and fair representation of the company's financial position. Reporting lower depreciation would certainly result in higher income for the corporation, but at the same time would increase the tax liability for the particular year. Similarly, overstatement of depreciation in the following year would result in lower income and consequently lower tax liability.

The amount of depreciation expense should be reported as incurred during the year and in accordance with the depreciation method (straight line, production, double declining, etc.) used by the organization. The financial statements are used by various stakeholders including investors. A company may find it difficult to raise capital from the market if it follows incorrect accounting methods, policies and procedures. The lead accountant should ensure that relevant corrections/changes are made and the net income is reported as actual.

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