The chief accountant of Phidias Publications Ltd. (Phidias) is thinking about how accrual accounting policy choices affect the cash flow statement. Phidias publishes a number of newspapers in mid-sized Canadian communities. One of the key success factors of the newspaper business is the circulation of the papers. Phidias spends a significant amount of money recruiting and maintaining subscribers. The accountant thinks that sound arguments can be made for both expensing the cost of recruiting and maintaining subscribers when they are in curred, and capitalizing the costs and amortizing them over a number of years.
The accountant has prepared the following cash flow statement, which is complete except for how to account for the cost of recruiting and maintaining subscribers. During 2017, Phidias spent $54,000 on this.

Required:
a. Present arguments for and against the two proposed accounting treatments for the cost of recruiting and maintaining subscribers.
b. Explain the effect of the two accounting alternatives on Phidias€™ income statement.
c. Complete Phidias€™s cash flow statement assuming that cash spent on recruiting and maintaining subscribers is expensed when incurred.
d. Complete Phidias€™s cash flow statement assuming that cash spent on recruiting and maintaining subscribers is capitalized and amortized over three years.
e. Discuss the difference between the statements you prepared in (c) and (d) above. What are the implications of the different treatments to the underlying cash flow and liquidity of Phidias?
f. Which cash flow statement do you think the managers of Phidias would prefer?Explain.

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Phidias Publications Ltd. Cash Flow Statement For the Year Ended December 31, 2017 Cash from operations Cash collected from customers and advertisers Cash paid to employees Cash paid to suppliers Cash paid in interest Cash from operations Cash from investing activities Proceeds from sale of capital assets Purchase of capital assets Cash from investing activities Cash from financing activities Dividends paid Repayment of bank loan Proceeds of long-term debt Cash from financing activities Unclassified-recruiting and maintaining subscriber costs Cash generated during the year Cash on hand on December 31, 2016 Cash on hand on December 31, 2017 $938,400 450,000) (362,000) 20,800) $105,600 44,000 (120,000) (76,000) (30,000) 70,000) 130,000 30,000 (54,000) 5,600 18,500 24,100