Movies and television shows are jobs. Some are successful, some are not. Studios must decide what to do with the cost of unsuccessful shows (‘‘flops’’). Some studios have been criticized for assigning the cost of flops to successful shows, which in turn reduces profits available under profit-sharing agreements with actors, actresses, directors, and others associated with the successful show. One studio was criticized for carrying the cost of flops in inventory instead of writing them off, thereby overstating both assets and profits. Studios point out that flops have to be paid for out of the profits from successful shows.
a. How does carrying ‘‘flops’’ in inventory overstate assets and profits?
b. When do you think the cost of a movie that turns out to be a flop should be written off (that is, expensed)?