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Assume you work as an assistant accountant in the head office of Netflix. With the increasing popularity of online movie streaming, your company has struggled to meet its earnings targets for the year due to the high cost of creating programming content unique to your company.

It is important for the company to meet its earnings target this year because the company is renegotiating a bank loan next month that is necessary for international expansion, and the terms of that loan are likely to depend on the company's reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain additional expansion funds .

The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the programming costs which have been capitalized (reported as an asset) be depreciated over a period extended from 4 years to 10 years. She claims that generally accepted accounting principles (GAAP) require estimates like this, so it wouldn't involve doing anything wrong.

Question 1: How will the change in depreciation period impact reported net income in the current and future reporting periods? Question 2: Is the CFO correct in stating that GAAP allows changes in estimates? Do you think it appropriate in this situation?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91889253

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