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Memo Stevesmith Targetinc.

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Submitted By SV001
Words 341
Pages 2
MEMO

To: CEO
From: Steve Smith Controller
Date: November 4, 2013

Subject: Advertising Campaign Reporting

We have extensive costs from our advertising campaign and our current earnings are below target. As a result, we find ourselves in a situation where we must make a decision concerning how these costs should be reported. This decision is ultimately yours to make but I would like to give you my assessment of the situation. I believe that while your decision is practical, it may not be as beneficial as it appears.

First of all, this is a grey area of accounting that relies on judgment. Despite the practicality of your judgment, I believe that it is incorrect method of reporting our advertising costs. Our advertising costs should not be recorded as inventory because it is incorrect. It is too early to distinguish if our advertising campaign was successful. Additionally, there are no long term benefits we can associate with the advertising campaign. If our advertising campaign failed and we have it reported as an asset, our recorded loss in the future will look incredibly poor. Also, this accounting practice may raise flags to auditors which may even result in fines. Even with the approaching planned debt offering, I believe that our advertising costs should be expensed normally to retain the conservatism principle of accounting. If our company makes the target earnings, our debt offering may appeal to only a small amount of additional investors. While our company may not reach the target earnings, we will still be able to acquire the debt financing that our company needs.

I believe that we should be conservative and report our advertising costs as an expense of this period as we normally would. I do not believe the risks of earnings management outweigh the benefits of maximizing our debt financing. Investors in the long-run

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