Case_-_Clear_One_-_Channel_stuffing

Case_-_Clear_One_-_Channel_stuffing - MANAGEMENT 120A CASE...

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MANAGEMENT 120A CASE 1 ClearOne Communications, Inc. CHANNEL STUFFING Objective: Understand channel stuffing by overstated revenues, income and accounts receivable. ClearOne Communications, Inc. is a provider of end-to-end video and audio conferencing services, including the manufacture and sale of video and audio conferencing products. From its inception as a manufacturer of this equipment through 2001, ClearOne sold its products through a nationwide network of manufacturer’s representatives. Sometime in early 2001, ClearOne decided to alter its business model and instead of utilizing manufacturer’s representatives, began selling its products through a nationwide network of distributors complemented by a direct sales force. Through early 2001, ClearOne experienced robust growth and increased product sales every quarter. From the selected financial data extracted from ClearOne’s Form 10-Ks that follow, this growth appeared to continue through fiscal 2002. However, a complaint filed by the SEC against ClearOne alleges that things may not be as rosy as they seem. Requirements Prepare an executive summary that answers the following questions. 1. Retrieve the SEC’s complaint against ClearOne Communications, Inc. ( www.sec.gov/litigation/complaints/comp17934.htm ). Describe management’s scheme for inflating revenue. 2. The SEC alleges that by the end of fiscal 2002, ClearOne had stuffed approximately $11.5 million of inventory into the distribution channel. On the basis of this assertion, what was the approximate amount of its alleged revenue overstatement by the end of 2002? 3. Does the financial statement data presented support your group’s estimate? Why or why not? Page | 1
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Management 120A Page | 2 CLEARONE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, ------------------------------------------------------------------------- 2002 2001 2000 ---- ---- ---- Product sales. .............................. $ 37,215,161 68.2% $ 28,189,612 70.7% $ 22,226,504 79.0% Service sales. .............................. 17,327,525 31.8% 11,688,793 29.3% 5,891,909 21.0% ------------- ---- ------------- ---- ------------- ---- Total net sales. ....................... 54,542,686 100.0% 39,878,405 100.0% 28,118,413 100.0% Cost of goods sold - products. .............. 15,057,167 40.5% 10,633,956 37.7% 8,033,867 36.1% Cost of goods sold - services. .............. 7,942,952 45.8% 5,869,106 50.2% 2,974,456 50.5% ------------- ---- ------------- ---- ------------- ---- Total cost of goods sold. .............. 23,000,119 42.2% 16,503,062 41.4% 11,008,323 39.2% ------------- ---- ------------- ---- ------------- ---- Gross profit. ............................... 31,542,567 57.8% 23,375,343 58.6% 17,110,090 60.8% Operating expenses: Marketing and selling. ................. 10,705,494 19.6% 7,753,292 19.4% 6,165,917 21.9% General and administrative. ............ 6,051,092 11.1% 4,648,999 11.7% 3,132,125 11.1% Product development. ................... 4,052,695
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Case_-_Clear_One_-_Channel_stuffing - MANAGEMENT 120A CASE...

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