posted by Nirav on .
You have recently been employed by a large retail chain that sells sporting goods. One of your tasks is to help prepare financial statements for external distribution. The chain's largest creditor, National Savings & Loan, requires that financial statements be prepared according to generally accepted accounting principles (GAAP). During the months of November and December 2012, the company spent $1 million on a major TV advertising campaign. The $1 million included the costs of producing the commercials as well as the broadcast time purchased to run them. Because the advertising will be aired in 2012 only, you decide to charge all the costs to advertising expense in 2012, in accordance with requirements of GAAP.
The company's chief financial officer (CFO), who hired you, asks you for a favor. Instead of charging the costs to advertising expense, he asks you to set up an asset called prepaid advertising and to wait until 2013 to record any expense. The CFO explains, “This ad campaign has produced significant sales in 2012; but I think it will continue to bring in customers throughout 2013. By recording the ad costs as an asset, we can match the cost of the advertising with the additional sales in 2013. Besides, if we expense the advertising in 2012, we will show an operating loss in our income statement. The bank requires that we continue to show profits in order to maintain our loan in good standing. Failure to remain in good standing could mean we'd have to fire some of our recent hires.” What should you do?
Here are some links on preparing financial statements that may help: