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 &
Trademark, Inc., a public company, designs, manufactures, and distributes greeting cards,
calendars, stationery, party goods, and specialty gift merchandise.
through four divisions:
Greeting Cards and Stationery, Calendars, Party Goods, and
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.
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
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.
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