MBA FPX 5010 Assessment 1 Training-Accounting Tool Practices

Training-Accounting Tool Practices

Congratulations to Sanjay on being on the Urban Outfitters team. It’s important for any district manager to have a good understanding of the accounting methods of the company since he or she will be dealing with the issues often. This manual provides instructions on how Urban Outfitters monitors and tracks important costs, such as ads, opening store locations, and website updates. The Urban Outfitters Group is a giant lifestyle retailer that sells the popular brands Urban Outfitters, Anthropologie, and Free People in stores throughout North America and Europe and through its online sales channels (U.S. Securities and Exchange Commission, n.d.). Established in 1970 and headquartered in Philadelphia, the company has been using accurate financial reporting to make decisions and pursue expansion and growth opportunities.

Accounting Methods Used by the Company

Advertising Costs

Typically, Urban Outfitters will take the accounting entries of advertising costs as they are incurred. These expenses include marketing efforts like catalogs, online marketing, and social media marketing. With catalogs that are directly mailed to customers, the associated expenses are first capitalized and then expensed after they are sent out. Selling, General, and Administrative Expenses (SG&A) (U.S. Securities and Exchange Commission, n.d.) includes advertising expenses reported on the income statement.

The company’s advertising policy is to expense most advertising costs, and thus costs can be matched with the time when benefits are expected to accrue, thereby gaining a better perspective on the company’s financial performance. In the fast-paced retail industry, the use of capitalization is uncommon as the benefits of such advertising are unlikely to be realized over several periods.

Store Opening Costs

When Urban Outfitters opens up a new Urban Outfitters store, all expenses related to the new store are recorded as they are paid. These costs are part of Selling, General and Administrative Expenses (SG&A) on the income statement, and involve recruitment and training of staff, travel, and employee salary costs.

Slightly higher SGA expenses over the last 3 years are in line with their constant growth in store count. It’s conceivable to capitalize costs of opening a store, and spread them out over the expected life of the store, but Urban Outfitters elects to do the opposite. This kind of accounting is conservative; it means there’s less risk that the costs are wrongly reported, and it allows these costs to be treated as a current or ongoing business expense (as they are not assets). Immediate expensing provides a true measurement of the company’s operations in financial statements.

Website Development Costs

The website development cost varies for Urban Outfitters according to its development stage. Planning and operating costs are expensed, and application and infrastructure development costs will be capitalized if substantial.

FY1607 Nil expenditure on web creative.FY1607 Web Creative Expenses ($000) Nil.

Traditionally, the company has followed the policy of making most of the costs incurred in building websites an “immaterial” cost, which is hence expensed. If costs are capitalised, this is done over the useful life of the website and the costs are matched to the benefits received. Smaller, immaterial costs are easier to expense, and won’t overstate assets or inflate the income statement.

Why These Methods Matter

The accounting methods used will determine how and when costs are presented in financial statements, which will impact profits. Advertising and store opening costs are deducted from net income at the time of the costs, since the value of those costs is considered an expense for Urban Outfitters. Website development costs are capitalized and amortized over the useful life of the web page. These techniques are designed to match the costs with the benefits that they provide and to adhere to the rules of GAAP, thereby providing a more complete picture for investors and management as to the company’s economic performance.

Importance of Notes

Notes to Financial Statements are critical, as they not only give context to the company’s financial statements, but they also offer an explanation of the company’s accounting policies and explain the numbers in the Financial Statements. They provide comprehensive details of cost accounts, including advertising, opening stores, development of websites, etc. For example, the Notes indicate that advertising expenses generally are expensed immediately, and the website development expenses are capitalized only at specific development periods. The district managers can refer to these Notes to gain a clearer understanding of the calculation of expenses, assets, and net income; they can then use this information to make appropriate decisions to support the growth and operation of Urban Outfitters.

Accounting Method Impact on Financial Statements

Urban Outfitters is an accrual-based company and accounts for the sale of its goods as soon as they are produced and its costs when they are incurred. The effect that this strategy has on the income statement is that advertising and store opening expenses are immediately recognized as an expense and thus are a reduction of net income when they are high. Immediate expensing will keep assets from being overstated on the balance sheet, thus offering a more conservative financial picture of the business. In contrast, the website development costs are capitalized and amortised over the life of the site, where the expense is spread out over a number of periods to match the benefits that are being derived. The accrual approach, overall, makes the financial data more transparent and allows matching of expenses with revenue, thereby providing stakeholders a sense of financial performance.

Comparison of Accounting Methods

Otherwise, if Urban Outfitters applied an alternate method to record costs, the financial statements would have a significant difference in profitability and asset values. For instance, if the advertising, opening the store, and the cost of building and developing the website were capitalized, instead of expensed when purchased, they would appear as assets on a company’s balance sheet and would be amortized over the useful life of the asset. This would boost the short-term bottom line as it would defer the cost but may underestimate the company’s assets, and thus less accurately report the financial health. 

In contrast, if a company adopted a Last In, First Out (LIFO) inventory valuation method, during a period of rising prices, the inventory valuation would result in a higher COGS and lower ending inventory on the balance sheet and lower net income. In summary, the selection of accounting methods impacts the timing and size of expenses recognised, the profitability reported in the period, and other assets reported, showing how important accounting selections can be in interpreting the accounting statements.

Preference for Expensing Costs

Advertising and opening expenses, most of the time, and website development, should not be capitalized, as I like to expense these costs as they come. The costs of such items can be expensed in the current year, and this will give a more accurate and conservative view of the company’s financials for that year, as these are true costs of generating revenue for the current year. The allocation of such expenses would present a false sense of wealth and profitability for a time, given the short time period in which these costs impact net income and assets; Retail environments such as Urban Outfitters’ experience rapid changes, which could make allocated expenses appear significant when they aren’t really. Immediate expensing also makes financial reporting easy and prevents errors that can negatively impact a company’s bottom line, allowing stakeholders, from managers to investors, to make informed decisions based on accurate and well-publicized financial information.

Conclusion

It’s important for District Managers to understand how Urban Outfitters takes into account advertising, store openings, and website development costs. This information enables managers to “read” financial statements correctly, to make accurate decisions, and to manage district operations well. These practices can help ensure the company’s growth and continue to maintain the reliability and accuracy of the financial reporting, which can be beneficial for new hires such as Sanjay.