Question :

Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him - advertising. In 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 the advertising costs should be reported as a cost of production, just like direct materials and direct labour. He thus recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Morgan supposed that this cost should be reported as an expense of the existing period, so as not to overstate net income. Other argued that it should be reported as prepaid advertising and reported as a current asset.

The president finally has to decide the issue. He argued that these costs could be reported as inventory. His arguments were practical ones. He denoted that company was experiencing financial difficulty and expensing this amount in the existing period might jeopardize a designed bond offering. Also, by reporting the advertising costs as inventory rather than a prepaid advertising, less attention would be directed to it by financial community.

Instructions

(i) Who are the stakeholders in this situation?

(ii) What are the ethical issues involved in this situation?

(iii) What would you do if you were Steve Morgan?