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. 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