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    Discussing an Ethics Case

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    I do not understand how to answer these case study questions. Could you please assist me.

    Ethics Case:

    BYP 1-7 Wayne Terrago, controller for Robbin Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him-advertising. During 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 advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until
    sold. Others disagreed. Terrago believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as Prepaid Advertising and reported as a current asset.
    The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory
    rather than as prepaid advertising, less attention would be directed to it by the financial community.
    I
    (a) Who are the stakeholders in this situation?
    (b) What are the ethical issues involved in this situation?
    (c) What would you do if you were Wayne Terrago?

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    Solution Preview

    (a) Who are the stakeholders in this situation?

    The stakeholders would be all those who will use the financial statements for decision making. If the statements are not made as per the accounting standards then they would not reflect the correct financial situation of the firm and anybody who relies on these statements would be affected and so is a stakeholder in the situation. Specifically we could say the stakeholders would be the creditors, shareholders, government, management, would be bond holders ...

    $2.19

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