Capitalized customer acquisition costs and earnings quality: A case study of PhotoWorks, Inc

Troy A. Hyatt, Susan G. Weihrich

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This case examines issues related to accounting method choice, earnings management, and earnings quality. Specifically, the case examines a company (PhotoWorks, Inc.) that chose the less conservative approach of capitalizing and then amortizing a certain type of advertising expenditure rather than expensing the costs as incurred. The primary purpose of this case is to illustrate the role of judgment in accounting method choice and how it provides potential opportunities for earnings management. The case also allows students to explore the multi-dimensional nature of financial reporting decisions and to develop a greater appreciation for how their accounting coursework relates to important "real-world" issues. After completing this case, students should be able to do the following: (1) describe factors that are involved in accounting method choice and support the appropriateness of an accounting method choice based on a search of the accounting standards; (2) understand and evaluate the effects of accounting method choice on the financial statements; (3) describe the conflicting motivations managers face when deciding on financial accounting methods versus tax accounting methods; (4) explain what is meant by earnings management, factors that motivate managers to manage earnings, methods they can use to manage earnings, and how earnings management affects earnings quality; and (5) describe the role of auditors in analyzing a company's accounting method choices and in assessing the quality of a company's earnings.

Original languageEnglish
Pages (from-to)117-148
Number of pages32
JournalJournal of Accounting Education
Volume23
Issue number2
DOIs
StatePublished - 2005

Keywords

  • Accounting method choice
  • Earnings management
  • Earnings quality

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