Solutions Guide:



Solutions Guide:

Chapter 14 Ethic Case: Wayne Terrago, Controller for Robbin Industries, was reviewing production const 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. Terrago believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as Prepaid advertising and reported as a current assets. The president finally had to decide the 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 this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs ad inventory rather than as prepaid advertising, less attention would be directed to it by the financial community. (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 Wayne Terrago?

(a) The stakeholders in this situation are:

• The users of Robbin Industries’ financial statements.

• Wayne Terrago, controller.

• The vice-president of finance.

• The president of Robbin Industries.

(b) The ethical issues in this situation pertain to the adherence to sound and acceptable accounting principles. Intentional violation of generally accepted accounting principles in order to satisfy a practical short-term personal or company need and thus create misleading financial statements would be unethical. Selecting one acceptable method of accounting and reporting among other acceptable methods is not

necessarily unethical.

(c) Ethically, the management of Robbin Industries should be trying to

report the financial condition and results of operations as fairly as possible; that is, in accordance with GAAP. Wayne should inform

management what is acceptable accounting and what is not. The basic concept to be supported in this advertising cost transaction is matching costs and revenues. Normally, advertising costs are expensed in the period in which they are incurred because it is very difficult to associate them with specific revenues.

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