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Capella University

MBA-FPX5010 Accounting Methods for Leaders

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Submission Date

Training-Accounting Tool Practices

Welcome to the Urban Outfitters family, Sanjay! It is important to recognize the reality that each company has its own style of accounting when navigating a situation like this as a District Manager. This guide demonstrates how Urban Outfitters addresses some of their largest and most significant expenses: advertising, new store openings, and website investments. Urban Outfitters, as a retail company, has built a significant and unified lifestyle business by consolidating its brands, Urban Outfitters, Anthropology, and Free People, with physical operations in the U.S and Europe, as well as a strong ecommerce business (U.S. Securities and Exchange Commission, n.d). Since its incorporation in 1970 in Philadelphia, the company has always been dependent on clearly and accurately seeing the financial data so that they are able to make an informed decision about the most appropriate way to steer the business for the purpose of achieving its growth and expansion goals.

Accounting Methods Used by the Company

• Advertising Costs

Urban Outfitters uses something referred to as ‘an incurred advertising cost’. They are required to include what is known as a paid media and/or advertising cost, which describes a company’s communication costs, in this case, costs of catalogs or other media where the advertising costs are incurred but are charged to the recipient as a cost of doing business. Costs of catalogs are incurred and charged to the advertising cost when paid to form a promotional cost. (SG&A) (U.S. Securities and Exchange Commission, n.d.).

This is a deferred advertising cost that is recognized only when the advertising materials are expected to generate advertising and are promotional materials, which in a fast-moving retail business is quite the rule (Kamal, 2023).

• Store Opening Costs

Urban Outfitters recognizes the costs associated with the new store openings in the period they are incurred, which can include costs associated with traveling, recruiting, and training of the new staff, which are charged to the selling, general, and administrative (SG&A) expenses in the income statement (U.S. SEC, n.d.).

Urban Outfitters has seen a three-year trend in SG&A expense growth. Urban Outfitters has aggressive, proactive, and possibly uncontrolled growth in SG&A expenses, which results in an increased burden from financial reporting. Expenses accounted for the opening of a new store are reported as expenses. This is also a conservative approach to accounting for store-opening costs. Costs are reported as expenses to reduce the reporting burden and mitigate the risk of misleading users of the financial statements by presuming that the costs create a store that is a long-term asset (Elkemali, 2024).

• Website Development Costs

Urban Outfitters has a consistent operating and reporting policy regarding the reporting of the opening of a new store. Costs of a site development project at the operating and planning phases are expensed. Costs for the development of the applications and the infrastructure are capitalized (Speedypaper, 2022).

Most costs for the development of a site previously have been expensed and reported as costs of the operations of the business, and thus were considered immaterial. Costs that are capitalized are amortized to expense over the useful life of the site. The timing of the cost and the site’s earning of revenue is aligned. Costs that are easily measurable but are deemed to be immaterial are also costs that are expensed. This approach is used to present financial statements in a manner that is not misleading.

• Why These Methods Matter

Cost measurement directly affects how costs are reflected within financial statements and when these costs are posted. For example, advertising expenses and new store opening costs for Urban Outfitters are recorded and deducted from net income for each period in which they occur. In contrast, website development costs are capitalized as assets and expensed through amortization. In both instances, costs are reported, and in accordance with GAAP, the economic benefit of the costs helps management and investors gain an accurate representation of the company’s financial condition and the results of its operations. This distinction in treatment ultimately ensures that financial reporting remains both transparent and aligned with the true economic substance of each expenditure.

Importance of Notes

Footnotes to financial statements are essential in interpreting the primary financial statements. They outline the company’s policies for accounting and provide explanations for figures in financial statements. They describe the type of expenses incurred for advertising, costs related to the store openings, and the website development (Rep, 2021). For example, costs are incurred for advertising when the financial statements record the expenses, whereas costs related to the website development are incurred during the development phase of the website. With the fast-changing business environment that Urban Outfitters operates in, effective strategies can be developed by management to meet the operational needs of the business.

Accounting Method Impact on Financial Statements

Urban Outfitters follows the accrual basis of accounting, which states that a transaction must be recorded in the books when the revenue is earned or when the business is charged with an expense, irrespective of any cash movement. Such a system creates a situation where Urban Outfitters is likely to be unprofitable. This is primarily due to the recognized advertising and new stores opening as expenses in the financial statement. However, in the balance sheet, the expenses recognized benefit the company by ensuring that the assets are not overstated, thus Urban Outfitters appears to be in a better financial situation. The costs incurred of developing the company’s website are capitalized expenses and are amortized to ensure that the costs are recognized in the financial statement to the extent that the benefit is realized. Urban Outfitters’ accrual system makes it clear to stakeholders the costs incurred and the revenue earned.

• Comparison of Accounting Methods

Urban Outfitters’ selection of accounting methods would make a difference to the valuation of their assets and the representation of their profitability. If Urban Outfitters were to classify the expenditure on advertising, expenditure on new stores, and expenditure on the website as cost of goods and services, these expenses would not be deducted from the net income, but would be classified in the balance sheet as an asset, and subsequently amortized. Income, in the short run, would be expected to improve, as these costs would no longer be expenses and would no longer negatively affect the income. The financial statements would show a larger financial asset, and the company’s financial position would be stated to be more aggressive than conservatively stated. (Speedypaper, 2022) Besides this, if Urban Outfitters were to change their inventory costing method from FIFO to LIFO, this would result in a higher cost of goods sold and lower net income and ending inventory, assuming costs of goods and services continue to increase. Accounting methods create a diversity of financial statements in formal expense recognition, the representation of profitability, and the presentation of the company’s financial position. The accounting methods that are chosen determine, to a large extent, how financial statements are shown.

Preference for Expensing Costs

I endorse considering advertising, costs related to new locations opening, and almost all costs associated with website development and changes, as costs that should be charged to the income statement, as opposed to considering them to be capitalized costs. Costs that are charged to the income statement related to advertising, new locations opening, and new website development and changes improve the measured profitability of the organization, and conservatively and accurately portray the financial position of the organization (Kajal, 2023). These reflect the costs of doing business to achieve sales for the accounting period. From the rapidly changing retail business perspective, having these costs treated as capitalization would likely create the impression that Urban Outfitters is more profitable and less financially stable. These costs should be charged to the income statement to simplify the reporting process, thus decreasing the likelihood of material misstatements of financial reporting. Reporting and the decisions that are made based on the reporting for the management of the organization are based on true and fair financial statements, which should lead to a reduction in the likelihood of material misstatements of financial reporting.

Conclusion

For Urban Outfitters to function as an organization and for their district managers to manage their district effectively, they need to be familiar with how the company deals with advertising costs, costs of new store openings, and costs of website development. New employees, such as Sanjay, should first acquire this knowledge to help the organization and to ensure that they are serving the organization to the best of their ability while at the same time ensuring the company’s financial data is accurately maintained.

References

Elkemali, T. (2024). Intangible and tangible investments and future earnings volatility. Economies, 12(6), 132–132. https://doi.org/10.3390/economies12060132 

Kajal. (2023, September 26). Principles of Expense Recognition – AnalystPrep | CFA® Exam Study Notes. AnalystPrep | CFA® Exam Study Notes. https://analystprep.com/cfa-level-1-exam/financial-reporting-and-analysis/principles-of-expense-recognition/

Rep, A. (2021). Notes to the financial statements: Current state and improvement. Business Systems Research: International Journal of the Society for Advancing Innovation and Research in Economy, 12(2), 60–78. https://hrcak.srce.hr/ojs/index.php/bsr/article/view/15539

Speedypaper. (2022). Essay Example: Accounting for Advertising Expenses and Costs. SpeedyPaper. https://speedypaper.com/essays/accounting-for-advertising-expenses-and-costs

U.S. Securities and Exchange Commission. (n.d.). Urban Outfitters Inc—Form 10-K. Retrieved October 2, 2024, from https://www.sec.gov/Archives/edgar/data/912615/000119312516525832/d118719d10k.htm