Frank, controller for Book Industries, was reviewing production cost reports forthe year. One amount in these reports continued to bother him- advertising. During theyear, the company had instituted an expensive advertising campaign to sell some ofitsslower-moving products. It was still too early to tell whether the advertising campaign wassuccessful. There had been much internal debate as how to report advertising cost. The vicepresident 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 beidentified as manufacturing overhead and reported as part of inventory costs until sold.Others disagreed. T. Young believed that this cost should be reported as an expense of thecurrent period, so as not to overstate net income. Others argued that it should be reportedas prepaid advertising and reported as a current asset. The president finally had to decidethe issue. He argued that these costs should be reported as inventory. His arguments werepractical ones. He noted that the company was experiencing financial difficulty andexpensing this amount in the current period might jeopardize a planned bond offering.Also, by reporting the advertising costs as inventory rather than as prepaid advertising, lessattention would be directed to it by the financial community.

Instructions:

a.Who are the stakeholders in this situation?

b.What are the ethical issues involved in this situation?

c.What would you do if you were Frank?