General Case Analysis

PolyMedica Corporation Case Study

Measurement I – MBA 632

Monte Hodge, Imani Hill, Albert Jackson, Michelle Treece

February 8, 2012

PolyMedica Corporation Case Study

PolyMedica Corporation provides direct to customer medical products in an effort to expand their customer base. The SEC and private investors are questioning the companies use of the direct-response exclusion to allow for advertising to be capitalized as an expense on the balance sheet rather than recording it as an asset. If this is not justified as a legitimate practice according to the exclusion rules it will be overstating the net income and equity. The CEO is being called upon to either justify the current method as appropriate or to change the method they are using.

PolyMedica uses their commercials as their business strategy to obtain and retain customers. While they indicate that their business model relies on this direct-response advertising, they are also admitting that to expand their customer base they are considering a more broad-based advertising scheme. The CEO states that they have no choice but to account for the advertising by capitalizing it because the formula for their business requires it, yet their new strategy is looking at a different advertising scheme that will not allow for this type of reporting. It is difficult to see the reason for thinking there is no other choice but to capitalize their advertising.

Capitalizing the expenditure for direct-response advertising makes the firm appear more profitable on paper without significant increases in cash flow. This method allows the money to be used as an added value to assets over a longer period of time. This gives the appearance that they still have that asset one, two or even three years later. Although the ads ran in 1991 a portion of that cost is listed as assets for fiscal years 1992 and 1993. No one gets to see the commercial in the subsequent years, yet they can claim they are still getting value from when...