You have recently been employed by a large clothing retailer. One of your tasks is to help prepare financial statements for external distribution. The companys lender, National Savings & Loan, requires that financial statements be prepared according to generally accepted accounting principles (GAAP). During the months of November and December 2018, 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 2018 only, you charge all the costs to advertising expense in 2018, in accordance with requirements of GAAP.

The companys 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 2019 to record advertising expense. The CFO explains, This ad campaign has produced significant sales in 2018, but I think it will continue to bring in customers throughout 2019. By recording the ad costs as an asset, we can match the cost of the advertising with the additional sales in 2019. Besides, if we expense the advertising in 2018, 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 wed have to lay off some of our recent hires. As an employee, should you knowingly record advertising costs incorrectly if asked to do so by your superior? Does your answer change if you believe that misreporting will save employee jobs?

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