Answered step by step
Verified Expert Solution
Question
1 Approved Answer
John is a CPA employed with a retail firm. He is currently preparing the firms quarterly financial statements for the three month period ending September
John is a CPA employed with a retail firm. He is currently preparing the firms quarterly financial statements for the three month period ending September 30th 2017.
"During the months of July and August, the firm spent millions of dollars on advertising. These costs have been debited to advertising expense. The companys chief financial officer asks John to prepare a September 30th adjusting entry to credit advertising expense and debit an account called prepaid advertising for the amount of money spent on advertising during the quarter. The CFO explains:
Money spent on advertising is an asset because it boosts future revenue, and therefore matching expenses to revenues (the matching principle) requires that advertising expenditure be expensed in a future period when the relevant future revenues are recognized. If we expense advertising expenditure in the same period as it is incurred, we will show an operating loss on our income statement for the quarter. Our bonuses are at stake.
Provide your responses to the following questions.
1. When are expenditures on advertising to be expensed, per GAAP?
2. Is the CFOs position consistent with GAAP?
3. Who will be hurt if John accepts the CFOs position?
4. Who will benefit if John accepts the CFOs position?
5. What should John do?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started