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Accounting Allah shmoop capitalisation of costs Okay So in our

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pillow talk income statement on the expenses line we treated

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everything as if the money was expensed in the quarter

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in which it was spent or was committed to be

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spent But there are many ways to account for things

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like marketing including the option of capitalizing the marketing costs

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and then advertising them over a longer period of time

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in hopes of giving better clarity to the operational profitability

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of the business And yeah this is not really kosher

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but a well did this in the day and it's

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kind of a famous story among accountants All right what

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does it mean to capitalize costs well in the normal

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world of investing in business the capital is spent on

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some asset that will clearly last years if not decades

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like an engine block smelting plant the Alec that for

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one hundred million dollars Ford can buy a brand new

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Blocks smelter which will likely last with at least twenty

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years Then be sellable for twenty million dollars to a

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Third World foreign buyer making bombs or go carts or

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noisemakers Well Ford wouldn't view in Year one the entire

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eighty million dollars in decline of that smelting plant like

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they wouldn't take it as an eighty million dollar expense

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all in that year Instead Ford would gradually depreciate its

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value over twenty years and say four million bucks a

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year applying straight line depreciation to fairly value that asset

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and then also attribute for million dollars of notional losses

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from it on the income statement Because eventually you gotta

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replace it to keep your smelting smelting Why do companies

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do this and why did they'd appreciate things Why did

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they have to track losses at all Well because someday

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this new smelting plant will wear out and they'll have

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to replace it Or the company just stopped Yeah that's

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what happens So some company's heir so proactive in accounting

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for future cost that they create what is called a

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sinking fund which in case of a gas guzzler car

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company might refer to the need to someday buyer build

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their own battery plan for the future An electric car

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making Well they might predict that they'll need to build

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this plant in five years and it'll cost three hundred

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million dollars so they might just take a loss of

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sixty million dollars this year putting the money into a

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kind of escrow account where it just sits and is

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eventually spent Teo build the brand spanking new battery factory

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to compete with Iran And yeah given his track record

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Good luck with that Ford So let's go back to

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the aggressive capitalization of marketing costs Will Marketing is a

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completely different animal than a factory Marketing just goes away

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after you spend the money right And you may ask

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Isn't that a no No Wouldn't that violate Gap Law

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to capitalize marketing expenses and then write them off slowly

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over a three year period to make the company look

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a more profitable than it actually is A well capitalized

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its marketing expenses in its heyday and associated them at

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a set rate of a predicted thirty nine months of

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expected subscriber life Well that is a well spent three

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hundred ninety dollars to acquire a subscriber via marketing Remember

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all those airdrop shipments of DVDs and Internet advertising and

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other things such that it then advertise the cost over

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what it expected the average life of a subscriber to

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be in the thirty nine month figure Note that we're

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just talking about how long l well expected subscribers toe

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hang with them We're sure they expected their subscribers too

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Live long healthy Happy lives are longer than thirty nine

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months anyway Yeah did some subscribers last more than thirty

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nine months Absolutely did some last less But a well

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was able to expense ten dollars a month of its

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capitalized marketing expense because it was able to argue that

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marketing dollars in its subscription business were tantamount to its

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building of factory to stamp out monthly charges for its

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service Well the application of creative accounting extends beyond marketing

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raw materials as noted in the chicken feathers and Coca

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Cola Examples we've done throughout these courses often come from

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multiple sources giving accountants flexibility and the way that they

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account for those products as expenses Additionally labor costs are

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often much more expensive than just the salaries paid Two

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employees the company pays a loading dock worker sixty five

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grand a year That worker then pays twenty grand of

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taxes to net forty five k in her pocket But

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the company has to provide benefits Worker's comp a storage

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locker secretarial support Human resource is support and other things

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such that the load on top of that sixty five

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grand is something like an another twenty five grand set

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Another way it cost the company ninety thousand dollars a

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year to put forty five thousand dollars into the workers

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current pockets And yes there's four savings in there we

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won't get into But that's kind of funny How that

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works isn't well Other strictures leveraging technology factories a competitive

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global supply of parts and labor complexities surrounding the cost

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of insurance and risk mitigation all coalesced to guarantee life

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employment for well educated accountants And we're talking life employment

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for accountants living longer than you know thirty nine months

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