MBA FPX 5010 Assessment 1

Training Guide – New Hires

Advertising

Advertising expenses have two exceptions to expense: prepaid advertising expenses and direct-to-consumer advertising. Direct-to-consumer advertising is initially expensed and subsequently capitalized when the company’s brand book, business brochure, or catalogue is distributed to customers, either in hard copy or digital format such as websites and apps. Prepaid advertising costs, however, are recorded as prepaid expenses and carried as current assets in the consolidated balance sheet, not on the financial consolidated statement (Urban Outfitters Inc., 2016).

As indicated in the 10-K Notes to Consolidated Financial Statements, advertising expenses for 2015, 2016, and 2017 are as follows:

2015: $103,582

2016: $414,104

2017: $527,159

MBA FPX 5010 Assessment 1 Training Manual-Accounting Tools and Practices 

In addition to that, the firm also incurred web creative advertisement costs, which are a category of selling, general, and administrative expenses (Urban Outfitters Inc., 2016). Web advertising expenses fall as shown below:

2015: $427,183

2016: $52,063

2017: $431,237

Urban Outfitters is a lifestyle specialty retailer of various brand names, including Urban Outfitters, Anthropologie, Free People, Terrain, and Bhldn (Urban Outfitters Inc., 2016). Advertising costs are generally expensed since they are incurred, except direct-to-consumer advertising that is capitalized and amortized over its projected future benefit period. All these advertising costs are largely the retail segment, such as web marketing, catalog printing, paper, postage, and other costs related to creating photographic images used in catalogs, on the web, and in mobile apps (Urban Outfitters Inc., 2016).

Costs for Store Openings

All the expenses associated with opening the stores are expensed as incurred. The expenses incurred include travel expenses, wages, hiring expenses, operating expenses, and training expenses. All these expenses are classified as selling, general, and administrative expenses in the Consolidated Statements of Income (Urban Outfitters Inc., 2016).

Development Costs – Website

Relevant expenses incurred during application and infrastructure development phases are capitalized. No development costs of internal-use software were capitalized during fiscal years 2015, 2016, and 2017 because most of the expenses were incurred at the operational and planning stages. Costs incurred at the application and infrastructure development stage were not material for these fiscal years (Urban Outfitters Inc., 2016).

Notes to Financial Statements

Notes to financial statements serve the critical purpose of clarifying the information presented on the financial statements. They typically explain the accounting process utilized and reveal important facts that have happened during or after the ended accounting period. They are designed to reveal as much relevant information as possible, to offer transparency as well as full disclosure as the company and auditors see fit (Marshall, 2017).

Accounting Method Effect on Financial Statements

Two primary accounting methods employed by companies are the cash method and accrual method. The greatest distinction between the two is when purchases and sales are posted. In the cash method, cash transactions alone lead to expenses and revenues being posted. Accrual accounting, however, posts revenue when earned and expenses when billed, although payment hasn’t yet been received (McCool, 2018). While both methods ultimately account for every transaction, the choice between them could impact the format of financial statements. A switch from the accrual to the cash accounting basis would be a difference in how profit and loss figures appear.

Capitalizing or Expensing Costs

The contrast between capitalizing and expensing costs is dependent on how they appear in the financial statements (Business Literacy Institute, 2019). When a cost is expensed, it gets charged on the income statement and deducted from revenue, which affects profit. When a cost is capitalized, it is considered to be a capital expenditure and shown as an asset on the balance sheet (McCool, 2018).