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L19 Notes_Part_21 - equipment The bookseller justified this...

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Quality of Earnings Problems A tire manufacturer is earning record earnings this fiscal year. Management accrues $10 million of loss for anticipated inventory write- downs in the next year. Your review of the market suggests that all inventory should be marketable at or above its recorded cost. A software manufacturer places its product on retailers’ shelves for sale to the public. The retailer keeps 10 percent of the retail sales and sends the rest of the revenue to the manufacturer upon sale. Unsold software is returned to the manufacturer. The company recorded $10 million in sales for its final shipment of software sent to retailers at the end of the fiscal year. An ebusiness bookseller merged with an ebusiness video/DVD seller to expand its product base and change its image to an entertainment provider. The bookseller added the video/DVD seller’s $100 million inventory to its inventory base and expensed the remainder of the acquired company, other than a small amount of property, plant, and
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Unformatted text preview: equipment. The bookseller justified this decision because it argued that the merger was, in reality, a purchase of inventory. P3: Earnings Management A large consumer products manufacturer placed some excess cash in trading securities that dropped in value by $1.5 million. Because purchasing short-term securities is unusual for the Company, management valued the securities at cost and decided to hold on to the securities until the values increased. The Company had $40 million net income for the fiscal year. An airline suffered an operating loss of $30 million this fiscal year, largely due to increases in fuel prices. The Company had been struggling with the auditors for several years concerning the realizable value of its airplane fleet. The auditors had been concerned that the fleet might be overvalued by $15 to $30 million. The Company informed the auditors that it was willing to write-off $30 million of the value of its airplane fleet....
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