Explain the Difference Between an Asset and an Expense

Question 1: Explain the difference between an asset and an expense

Answer: An asset is something which is owned by the company from which company will generate future probable economic benefits.

Expense means decrease in economic benefit during the reporting period in form of depletion of asset and increase in liability.

Question 2: Explain the role of advertisement in the company’s customer acquisition strategy

Answer: In a company like Polymedica advertisement plays a significant role. As the sales of the company is directly linked with its advertisement. The advertisement acts a s means to attractc customers and then to pursuade them to buy the product thereby increasing the company’s sale. Since under the accrual system of accounting the sales are recorded as soon as the goods leave the warehouse/factory. It is not relevant that the amount is aslo received at that point of sale.

Question 3: What are the arguments in favor of capitalizing the direct respponse advertisement expenditure? What are the arguments in favor of expensing the direct response advertisement expenditure as incurred? As a CEO of PolyMedica would you favor capitalizing or expensing the direct response advertisement cost?

Answer: PolyMedica principle strategy was to leverage its operating platform and complaince management to expand its business. PolyMedica witnessed continued growth in its direct-to-consumer business by expanding its customer base. Th treatment of advertisement expense resorted by the company was fair since in the statement of position 93-7 of AICPA ruled that though the advertisement cost should be expensed as and when it is incurred the exception to this rule was direct response advertisement which must be shown in the balance sheet and written off over time. In order to qualify a direct response advertisement cost company has to show a proof that ads had generated sales for which  the company already had in place a customer record system in place.

As per the ACSEC  concept statement no.5 releating to recognition it is concluded that for most of the advertisement the probable benefits are not measurable with the degree of reliability required to report an asset in the financial statement should be expensed in the income statement and since the probable economic benefit deriving from the advertisement are not known with certainity the same should not be recorded as an asset.

As a CEO I would like to capitalize the advertisement cost as the profit is already in a declining trend plus as per the ACSEC direct response advertisement cost can be capitalized if the company has the data regarding customers. The data of the customers are maintained by the company which conatins the name, related direct advertisement, a coded order form or response.