For sales returns for the second quarter of fiscal

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for sales returns for the second quarter of fiscal 2011. GAAP requires tha:: firms report revenues net of anticipated sales returns. Companies use their historical experien with product returns to determine the sales returns expense (a debit on the income stateme with an offsetting entry to a sales-return allowance (a credit balance on the balance sheet). Wh customers return products, the company reduces the allowance for sales returns on the balan sheet. At the end of the quarter, the company estimates sales returns for the current quarters sales, records the appropriate expense on the income statement, and updates the sales-retur allowance. It is atypical for a company to have a negative expense for sales returns. A neqatlvs sales-return expense (a "reversal") increases revenues and earnings. This is what Green Mount . Coffee reported in 20 2011. On an after-tax basis, the reversal increased Green Mountain Coffee's net income by $14,468 thousand or about $0.10 per share (147,558,595 shares diluted outstandi at March 26, 2011). A skeptical analyst might conclude that it recorded a negative accrual to bee; the Street's expectations. Such behavior hinders the quality of reported earnings.
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Module 5 I Revenue Recognition and Operating Income 5-34 d both reports from the external auditor and take special note of any deviation from boil- erplate language. e the footnote on accounting policies (typically footnote 1) and compare the company's icies to its industry peers. Deviations from the norm can signal opportunism. 2xamine changes in accounting policies. What would the company have reported absent the ge? Did the new policy help it avoid reporting a loss or violating a debt covenant? '-OIllpare key ratios over time. Follow up on marked increases or decreases in ratios, read otes and the MD&A to see how management explains such changes. Follow up on ios that do not change when a change is expected. For example, during the tech bubble, ridcom, Inc., reported an expense-to-revenue ratio (ER ratio) of 42% quarter after quarter, spite the worsening of economic conditions. Later it was discovered that managers had liberately underreported expenses to maintain the ER ratio. The lesson is that sometimes change" signals managerial intervention. eview ratios of competitors and consider macro economic conditions and how they have . ed over time. Are the ratios reasonable in light of current conditions? Are changes in the me statement aligning with changes on the balance sheet? - ntify nonrecurring items and separately assess their impact on company performance and ition. Take care when using pro forma numbers reported by the company. ecast financial statements as necessary to reflect an accounting policy(ies) that is more in e with competitors or one that better reflects economically relevant numbers. We illustrate recasting at several points in future modules. For example, we can convert LIFO inventory FIFO and we can capitalize operating leases.
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