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Issue in Accrual Accounting

As do many retail companies, Starbucks Corporation (Starbucks) uses a 52-53 week convention for its fiscal year, with its fiscal year ending on the Sunday nearest September 30. The 2015 fiscal year ended on September 27, 2015. On September 1, 2015, Starbucks entered into an agreement with its media agency,Publicis Groupe's Spark (Spark), to run an advertising promotion prior to the 2015 December Holiday Season and paid $4.5 million in advance and recorded that amount as Prepaid Advertising (an asset) in its General Ledger. The campaign was to run during the months of September, October, and November 2015.

Applying accrual accounting, Starbucks should record $1.5 million in Fiscal Year (FY) 2015 and $3.0 million in FY 2016. The current projections for FY 2015 shows Starbucks will have a great year and will exceed estimated profits. However, on September 15, 2015, the Chief Financial Officer informed senior management based upon the proposed FY 2016 budget, FY 2016 will be less profitable than FY 2015. He proposes in lieu of recording the $3.0 million advertising expense in FY 2016, Starbucks record total Prepaid Advertising in FY 2015.

Please address the above facts in this case as follows:

What is the underlying accounting theory for accounting for Prepaid Advertising?

If management were to accept the Chief Financial Officers proposal, what would be the effect of their action?

Who are the stakeholders affected by the proposed accounting?

If you were the Chief Financial Officer, what accounting would you propose to senior management and why?

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