Excel Communications is a dinect sales marketer of longdistance phone services. The company earns revenues by selling long-distance services to new subscribers. The company is preparing to "go public" through an initial public offering (IPO) of its stock. As with any IPO, the trick for an investment analyst is to determine the value of the stock.
One of the controversial valuation issues for Excel is bow to treat the costs the firm incurs to obtain subscribers. Excel defers a lange portion of the costs it incurs to sign up new subscribers-$$\$85$$ million in the first two months of 1996 alone. Excel amortizes these costs and revenue over 12 montbs as a way to "appropriately match revenues and expenses."
Put yourself into the position of a stock analyst. Write a report for your investor clientele explaining the effect of Excel's accounting methods on its level of reported net income. Be sure to include a discussion of whether this accounting method provides a fair picture of the firm's "economic earnings."