This problem requires that students prepare financial statements for a direct-response marketing firm where direct-response marketing costs must be recognized immediately or over an extended period. Students are then asked to compare the two methods.
It also requires students to prepare financial statements for a retail firm that sells extended warranties. The first set of financial statements must report extended warranty payments as revenue on the date of sale. The second set of financial statements must report amounts received for extended warranties as revenue during the periods when the firm expects to incur extended warranty costs. Students must then compare the two methods.