03-5c_trademark_inc_part1

03-5c_trademark_inc_part1 - Case 03-05 Trademark, Inc. Part...

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Case 03-05 Trademark, Inc. Part 1—Accounting Issues This case study is the first of a two-part Earnings Management Case. The purpose of Part 1 is to provide you with background information relating to Trademark, Inc. and raise several accounting and auditing issues affecting Trademark during the current fiscal year. The conclusions reached in this case study will be used in Part 2 — Misstatements & Materiality. Trademark, Inc., a public company, designs, manufactures, and distributes greeting cards, calendars, stationery, party goods, and specialty gift merchandise. Trademark operates through four divisions: Greeting Cards and Stationery, Calendars, Party Goods, and Specialty Gifts. In 1994, Trademark acquired a 100 percent interest in a Swiss company that manufactures and distributes similar products in Western Europe. Trademark has not integrated its operations on a global basis, and through fiscal year 1999, the Swiss company operated as a separate, wholly-owned subsidiary. Trademark operates five manufacturing plants in the U.S. Trademark’s primary customer base in both the U.S. and Europe consists of drug store and supermarket chains as well as specialty gift retailers. For its U.S. operations, Trademark maintains its inventory in both company-owned and public warehouses. Typically, Trademark’s shipping terms are FOB shipping point, and orders are shipped, if stock levels permit, to customers within 48 hours or upon completion of production. Trademark’s return policy allows customers to return damaged goods for a refund or credit within 30 days of shipment. The company began operations in 1981 and, after experiencing significant growth from fiscal years 1989 through 1991, offered its stock to the public in 1992. Trademark’s growth continued through fiscal year 1993. However, revenues were flat from fiscal years 1994 through 1997 (ignoring the acquisition of the Swiss company). In fiscal year 1998, Trademark’s revenues decreased. The schedule included as Exhibit 5-1-1 shows Trademark’s revenues for each of the past five fiscal years ending on June 30, along with other financial data. Trademark’s CFO, Rob Arnold, attributes the company’s growth rate through 1993 to its successful magazine and in-store marketing campaign led by Maxine Hartman, Vice President of Marketing. Mr. Arnold attributes the flat growth rate, beginning in fiscal year 1994, to increased competition from specialty companies and entertainment companies who began providing similar merchandise. Mr. Arnold cites the popularity of “electronic” greeting cards offered on the Internet for the decrease in revenues in 1998. Copyright 2001 Deloitte Development LLC All Rights Reserved.
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Case 03-05: Trademark, Inc.—Part 1 Page 2 Mr. Arnold recently engaged Munney, Groughs, & Treez, an investment banking company, to evaluate Trademark’s financing options. The company and its advisors are currently exploring the possibility of a public debt offering in the near future. Trademark
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03-5c_trademark_inc_part1 - Case 03-05 Trademark, Inc. Part...

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