Accounting Ethics Question?

Question

I am having some trouble with a new business. I am concerned because the large advertising expense will erode profits for the first year of operations and I know that to obtain financing you will be required to submit an income statement prepared based on absorption costing. A manager approached me about a way to improve profits so it will be easier to obtain financing for future operations. The manager suggested that I have the controller classify the large advertising expense as a product cost, similar to materials and labor. How would classifying advertising expense as a product cost improve profits? Is this approach ethical? Is it legal?

Answer 1

The suggested approach is neither ethical nor legal. First of all. it violates GAAP. Secondly, if you were doing proper absorption costing, the advertising cost would be accurately reflected in the income statement.

Reclassifying would only make your product costs look WORSE.