Advertising Expense/Earnings Management Essay

834 Words Nov 11th, 2012 4 Pages
Accts. 3121
Writing Assignment 1.
October, 8th 2012

The issue here is about how to treat an extensive advertising campaign cost for reporting purposes in Target Inc. The Controller (CFO), Steve Smith is holds that it should be reported as an expense for the current period, basing his argument on the conservative principle of accounting which had been in place in the company. However, the Vice President and the CEO disagree with him and insists that the expense be reported as part of manufacturing overhead cost until the goods are sold, then can it be recorded as an expense. If it is not treated expensed for the current period, then it will be capitalized and thus will appear only in the balance sheet and not in the income
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What he means by “This is important, given that the company is planning a seasoned equity offering in the upcoming year” is indicative of his ill-intentions to circumvent conventional and accounting rules. Brief, he is resorting to earnings management techniques as a means of maintaining a positive environment of financial stewardship. This is unethical because he is violating or say, stretching accounting rules beyond their intended bounds. This is very risky because it will need to continue in order to prevent a negative result in terms of financial stewardship. Although the motivation to him is for the company to realize improved earnings, the reality is that it brings greater harm than good as the means of achieving this is not honest.
Putting me in the shoes of Steve Smith I will do what is right; try to be consistent with the rules and principles that had been used in the past. I will write a memorandum warning of the consequences of executive action in the long run. In this way I will be exonerating myself of any legal actions that will definitely follow. I will thus side-step management and be the whistleblower by informing the Board of Directors.


To: Board of Director
From: Steve Smith, Controller
CC: Vice President; CEO
Date: October, 8th 2012
Subject: 2012

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