Fin-Acct National Savings & Loan

TO:

FROM:

DATE:

SUBJECT

Facts of the Situation

I am an employee of a large sporting goods retail chain who is responsible for preparing financial statements for external users. I am currently working on the three-month period statements ending by June 30 for the chain's largest creditor, National Savings & Loan. The CFO has asked me to capitalize a $120000 cost for a radio and TV advertising campaign, which is conducted in May and June, to prevent an operating loss shown on the company's income statement for the quarter and maintain a good standing with the creditor.

The CFO believes that the advertising increases sales in May and June and expects the advertising effects to continue in July. According to the matching principle, expenses should be recognized in the same period as the related revenue. In this situation, expenses are not incurred directly to produce a particular amount of revenue. Because of the difficulty in estimating the effect of advertising expenditures, accounting principles dictate that advertising should be recognized as an expense in the period incurred.

Ethical Issue and the Stakeholders

The ethical issue in this situation is whether my obligation of following the ethics in accounting is greater than that of following the CFO's request for the employers' financial interests.

Stakeholders include me, the CFO, other managers and employers, the creditors, and other current or future investors.

Values Related

Values related to this situation include competence, honesty, loyalty to my employers, and responsibility to users of financial statements.

Alternative Courses of Action

There are three alternatives in this situation.

1.Refuse the CFO's request and record the advertising costs as an expense on June 30.

2. Follow the CFO's request and capitalize the advertising costs as a prepaid asset.

3. Resign from the company.

Evaluate the Courses of Action

Following are three evaluations according to...