HELP HELP HELP Assume you work as an assistant accountant in the head office of
ID: 2554847 • Letter: H
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HELP HELP HELPAssume you work as an assistant accountant in the head office of Netflix. With the increasing popularity of online movie streaming, your company has struggled to meet its earnings targets for the year due to the high cost of creating programming content unique to your company. It is important for the company to meet its earnings target this year because the company is renegotiating a bank loan next month that is necessary for international expansion, and the terms of that loan are likely to depend on the company’s reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain additional expansion funds . The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the programming costs which have been capitalized (reported as an asset) be depreciated over a period extended from 4 years to 10 years. She claims that generally accepted accounting principles (GAAP) require estimates like this, so it wouldn’t involve doing anything wrong.
Question 1: How will the change in depreciation period impact reported net income in the current and future reporting periods?
Question 2: Is the CFO correct in stating that GAAP allows changes in estimates? Do you think it appropriate in this situation? HELP HELP HELP
Assume you work as an assistant accountant in the head office of Netflix. With the increasing popularity of online movie streaming, your company has struggled to meet its earnings targets for the year due to the high cost of creating programming content unique to your company. It is important for the company to meet its earnings target this year because the company is renegotiating a bank loan next month that is necessary for international expansion, and the terms of that loan are likely to depend on the company’s reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain additional expansion funds . The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the programming costs which have been capitalized (reported as an asset) be depreciated over a period extended from 4 years to 10 years. She claims that generally accepted accounting principles (GAAP) require estimates like this, so it wouldn’t involve doing anything wrong.
Question 1: How will the change in depreciation period impact reported net income in the current and future reporting periods?
Question 2: Is the CFO correct in stating that GAAP allows changes in estimates? Do you think it appropriate in this situation?
Assume you work as an assistant accountant in the head office of Netflix. With the increasing popularity of online movie streaming, your company has struggled to meet its earnings targets for the year due to the high cost of creating programming content unique to your company. It is important for the company to meet its earnings target this year because the company is renegotiating a bank loan next month that is necessary for international expansion, and the terms of that loan are likely to depend on the company’s reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain additional expansion funds . The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the programming costs which have been capitalized (reported as an asset) be depreciated over a period extended from 4 years to 10 years. She claims that generally accepted accounting principles (GAAP) require estimates like this, so it wouldn’t involve doing anything wrong.
Question 1: How will the change in depreciation period impact reported net income in the current and future reporting periods?
Question 2: Is the CFO correct in stating that GAAP allows changes in estimates? Do you think it appropriate in this situation? Assume you work as an assistant accountant in the head office of Netflix. With the increasing popularity of online movie streaming, your company has struggled to meet its earnings targets for the year due to the high cost of creating programming content unique to your company. It is important for the company to meet its earnings target this year because the company is renegotiating a bank loan next month that is necessary for international expansion, and the terms of that loan are likely to depend on the company’s reported financial success. Also, the company plans to issue more stock to the public in the upcoming year, to obtain additional expansion funds . The chief financial officer (CFO) has approached you with a solution to the earnings dilemma. She proposes that the programming costs which have been capitalized (reported as an asset) be depreciated over a period extended from 4 years to 10 years. She claims that generally accepted accounting principles (GAAP) require estimates like this, so it wouldn’t involve doing anything wrong.
Question 1: How will the change in depreciation period impact reported net income in the current and future reporting periods?
Question 2: Is the CFO correct in stating that GAAP allows changes in estimates? Do you think it appropriate in this situation?
Explanation / Answer
Answer 1 - The change in depreciation period , that is extending it from 4 years to 10 years will reduce the depreciation expense in the current as well as future periods, thereby the net income will be higher.
Answer 2 - Yes, the cfo is correct in stating that GAAP allows chamges in accounting estimates. However, in situations like this, a change in accounting estimates is allowed only when the management feels that it is reliable. In the given case, the CFO wants to change it to improve its performance and profitability and not because it considers that it will lead to a better and more truthful presentation of the financial statements. Hence, in my opinion, it is not appropriate in the given situation.
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