Poly Medica Case Study Essay Example

response advertising beyond the period in which the expense has been incurred.

Polymedica needs to determine the rate at which customer sales decline over time due to direct response advertising. This is necessary to properly amortize the asset and comply with revenue recognition exemptions. Capitalizing these advertisements will allow Polymedica to enhance shareholder wealth by spreading the expense over a four-year period. Moreover, it enables the company to allocate more funds annually for advertising, resulting in a larger customer base and a competitive advantage over competitors not utilizing the exemption. On the other hand, expensing the entire advertising cost provides analysts with a clear view of annual advertising expenditures. Consequently, there may be less resources required for tracking these advertisements, such as assigning numerous 1-800 numbers to account for measurable expenses.

Allowing the SEC and short sellers to have a clear understanding of the company's worth in relation to its competitors is another benefit. Unlike tangible assets, such as machines that can be assigned a specific monetary value and reflected in the balance sheet, advertising is an intangible asset. Therefore, if the company were to be sold, the money spent on advertising would not provide any future benefits to the buyers nor have any sellable value. This intangible value is what leads short sellers to believe that the company's shares are actually overvalued.

The SEC's intervention is aimed at ensuring accurate disclosure of shares traded in the stock market to protect consumer interest. If the SEC denies the capitalization of advertising, Polymedica's financial statements could be significantly affected. Exhibit A presents a comparison of balance statements, with advertising shown both as an expense and as an asset.

When advertising is reported as an expense rather than an asset, there is a notable decrease in assets.

In order for the balance sheet to be balanced, there needs to be a decrease in shareholder equity to offset the decrease in assets. Exhibit B demonstrates a comparison between income statements that consider advertising as both an expense and an asset. The main difference is that instead of Polymedica making a profit for fiscal years 2002 and 2003, they would be showing a loss. A comparison of cash flow statements was not performed as there is no actual change in cash flow, only a change in how it would be presented in the statement.

Polymedica should collect data from their direct response advertising to better allocate marketing funds. By analyzing the frequency of calls to specific 1-800 numbers, the company can ensure that money is being spent efficiently on target demographics. This analysis can also determine if there is a diminishing return on advertising and guide future decisions on reducing waste and spending on underperforming ad spots.

Once people become more familiar with Polymedica, advertising expenses should decrease, closing in on the actual amount. The company must accurately determine the percentage of ongoing sales generated from the initial 1-800 number to best reflect its depreciation. Additionally, moving forward, it is crucial for the company to invest in a lobbying firm to protect the value of direct response advertising as an asset. One of the CEO's responsibilities is to employ all legal means to enhance shareholder equity.

The purpose of a shareholder is to generate profits. If a company is not generating profits, it will be unable to sell stock

and acquire the necessary capital for growth. As a CEO, having the option to capitalize the advertisement allows him to enhance shareholder equity, demonstrating stability. If the SEC does not approve this accounting measure, Polymedica would be obliged to treat the advertising as an expense. This could result in a significant decrease in stock prices and potentially cause financial difficulties for the company in the long run.