Crane Corporation was in the process of completing the financial statements for the latest fiscal year. Susan

Question:

Crane Corporation was in the process of completing the financial statements for the latest fiscal year. Susan Randal, Crane's CEO, was reviewing the comparative financial statements and expressed some concerns. In comparing the current year's income statement against those of the prior years, she noticed that total sales had decreased slightly. Further, the salaries expense had increased while the advertising and research and development expenses had decreased. Although the total operating expenses were essentially the same, Susan was concerned that the increased salaries expense would be questioned by the investors and financial analysts in light of the decreases in advertising and research and development. She knew that the lower sales would be blamed on reduced advertising and less spending on research and development. As a result, Susan ordered the accountants to issue a condensed income statement that would present all operating expenses as a single amount. Also, during the year Crane Corporation had purchased another company for a price higher than the total fair market value of the purchased business. Crane properly recorded the excess cost as goodwill, but the total amount of goodwill had increased substantially because of this purchase. Susan was concerned that this rather large increase in goodwill would be seen as an unnecessary purchase and investors and analysts would become upset. Thus, Susan ordered that the goodwill be lumped in with the other assets rather than listed separately on the balance sheet where it could easily be seen. The accountants argued that attempting to hide these items from investors and analysts would be unethical. They further argued that GAAP required full disclosure, and that if Susan insisted on providing condensed statements, details would need to be provided in the footnotes anyway. Susan reluctantly agreed to the disclosure, knowing that often footnotes are not read.
Why would Susan want all the operating expenses lumped together? Why would Susan want the goodwill included as other assets? Were the ethical concerns raised by the accountants valid? Are any ethical issues involved in providing condensed information with the details included in the footnotes? Do you have any additional thoughts?

Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of...
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Accounting

ISBN: 978-0133052152

2nd edition

Authors: Robert Kemp, Jeffrey Waybright

Question Posted: