Question

In: Accounting

Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount...

Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him—advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful.

There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Morgan believed that this cost should be reported as an expense of the current period, so as not to overstate net income. Others argued that it should be reported as prepaid advertising and reported as a current asset.

The president finally had to decide this issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing the advertising costs as inventory rather than as prepaid advertising, less attention should be directed to it by the financial community.

  1. Who are the stakeholder in this situation?
  2. What are the ethical issues involved in this situation?
  3. What would you do if you were Steve Morgan?

Solutions

Expert Solution

Question 1- Who are the stakeholder in this situation?

Answer: The stakeholders are:

a) Steve Morgan, Controller of Newton Industries

b) Vice President of Newton Industries

c) President of Newtown Industries

d) Others of Newton Industries

Question 2 - What are the ethical issues involved in this situation?

The accounting issue discussed here is how advertising cost incurred should be reported in the financial statements. The scenarios discussed by various stakeholders are-

a) Cost should be shown as part of Production cost;

b) Cost should be shown as Prepaid Assets and expense in the future period;

c) Cost incurred should be capitalised as inventory;

d) Cost should be shown as manufacturing overhead as part of Inventory cost until sold;

e) expense of the current period

The ethical issues are cooking or showing incorrect accounting treatment related to Advertising cost. These cost are incurred to sale the products of the company and such should be treated as current period selling and advertising cost in the Income Statement.

Question 3 -  What would you do if you were Steve Morgan?

I would account the advertising cost as current period expense in the Income Statement as these are selling cost incurred to sale the products of the company and not production or manufacturing cost related to inventory.


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