Sunbeam Accounting Analysis

Sunbeam Accounting Analysis

This provides an opportunity to gain control over the operational and financial aspect of the company, thereby eliminating whistle blowing chances and creating an easy control to manipulate numbers. Announced a restructuring charge Of 337. 6 Million Opportunity: Restructuring charges are of self-adjusting nature. Future expenses might be hidden in the restructuring charges recognized in the present day. These future expenses will not be recognized thereby boosting future income and credibility in improved performance.

In this case, it is a ‘Big-Bath’ scenario, the company has done badly in the previous 3 quarters, ND the opportunity to lower the earnings for this year and show increased performance for the upcoming year is higher. Divested the non-core business activities, consolidated functions and reduced head count of the company Opportunity: Consolidation and reduction of head count provides an opportunity to lower expenses and boost profits. Divesting business operations provides additional cash flow to the firm.

This particular cash flow can be disguised as a part of income and the divestitures can be recognized as losses. Asset-write offs also means that business circumstances are unfavorable and save the company taxes. Announced three year plan to improve revenues, operating margin and return on equity by growing geographically, introducing new products and reducing cape and working capital Opportunity: This provides an opportunity to increase revenues and increased expenses. These expenses can be disguised / capitalized due to accounting flexibility. Lower expenses and higher revenues generate high operating margin.

Increase in supplier and retailer network will provide the company a network through working capital can be kept low. 2. Focus on the allegations made by Baron’s about Sunbeam’s accounting. Do you find any red flags that may support these allegations by looking at the “as reported” financial of Sunbeam? Following are the allegations made by Baron’s about Sunbeam accounting. Also noted along with each point are the red flags from the ‘as reported’ financial of Sunbeam that support the allegations inventory Write-off: Support: The restructuring charge of 154. M is recognized for activities like firing employees, breaking leases agreements etc. Going by the SO and COGS for the earlier fiscal year, the amount recognized is pretty high unless it is intentional. Working capital (Current Assets – Current Liabilities) increase from 295 to 41 1 from 1 995 to 1 996 by 33%. Going by the same standards, if inventory increased by MOM in 97, the Working capital would have increased by 22% from 411 to 501 , which should be considerate by historic standards. The ratio of cost of goods sold to the net sales has also dropped from 91 . 5% to 71. 1 % despite increase in sales. Plunging back product warranties: Restructuring costs were used to create reserves for warranties, which were ploughed back into income statement Support: Other current liabilities and there long term liabilities decrease by 18. MM and 11. MM. These means that the revenue has increased by MOM for the year. The significant drop in the company’s selling, general and administrative charges from 1996 to 1 997 also seems to suggest a significant reversal of warranty expense, thereby increasing the Company’s net income. This could be a red flag.

Lower depreciation charge due to write off of UP Support: If depreciation is considered a part of COGS or SO, the reported COGS + SO cost for 1 997 is lower than that of 1996, despite reporting higher revenues. The asset write off of MOM contributes to a lower depreciation charge which boosts profits. Capitalizing advertising expenses Support: As a % of revenue, the SO expense has decreased from 21 % to 1 1 % from 1996 to 1 997, that’s aggressive considering the marketing activities the company carried out. This is associated with the year in which the company introduced a new product.

Such years involve large expenses. Reducing the allowance for doubtful accounts Support: The Company’s revenues increased considerably (19%). However, the Accounts receivables also increased sign efficiently (38%). Increase in venues are generally associated with a proportional increase in the allowance for doubtful debts. By not reporting a significant ‘allowable for bad debt accounts’, the company is able to overstate its profits and could be a cause for concern in the long run, if the receivables turn out to be bad. Increase in inventories Support: The inventory increase in 1 997, YOU, was 58%.

Additionally, the COGS to revenue ratio reduced from to 72% in 1997. This combination of increase in inventory and reduction in COGS as a percentage of revenue seems to indicate that the fixed costs may have been spread over a larger ease through over production, thereby causing the COGS to reduce. This may be a cause for concern and could be a potential red flag. Extensive use of ‘Bill and Hold’ sales Support: The massive increase in accounts receivable relative to the increase in sales could suggest that the Company’s managers are indulging in channel stuffing.

Additionally, the company also offered 6 month credit time for most retailers, which is abnormal. These would most likely be sales recorded, increased revenues, increased receivables and reduced inventory. 3. Compare the “as reported” and “restated” financial of Sunbeam. Do you e any evidence supporting the allegations in the differences between these statements? The allegations made by Baron’s and the evidence from the ‘as reported’ and ‘restated’ financial are mentioned below: Selling written-off inventory: In the restated financial, the inventory is only written back by $2. 9 MM. If the company had truly written-off scalable inventory, then the restated inventory number would have been increased by a much larger amount. Therefore there is no evidence of these allegations. Plunging back product warranties: In the 1 997 restated financial statements, the “other current liabilities have men increased by $37. 9 and the long term liabilities have been increased by $13. MM. This suggests that the warranty provisions allegations might be true. However, this is assuming that these increases are due to the warranty write ups.

Restructuring charge in 1996 and 1997 was reversed by $44. Mm and $ 14. Mm indicating that the company had an excess charge in the reported financial statements Lower depreciation charge due to write off of pep: In the restated financial of 1996 and 1997, the value of the property plant and equipment has been increased by 59. Mm and $8. M respectively. This seems to suggest that the Company may have used the restructuring charges to write down assets in order to recognize a lower depreciation expense.

However, if this is true, the amount written down seems to be significantly lower than $92 Capitalizing advertising expenses: For 1997 restated financial statements, the SO&A expense as a percentage to sales has been increased from 11% to 14%. Also, the cost of goods sold has been restated from 72% to 77%. This could be partly due to the higher depreciation on account of the larger asset base post restatement. If the allegations were true, the restated PEP number would be lower. Reducing allowance for doubtful accounts: In the 1 997 restated financial statements, the accounts receivables have been reduced by $67. Million. This could have been partly due to the increase in the allowances for doubtful accounts in the restated financial statements as compared to the as-reported financial statements and hence supports the allegations made in the Baron’s article. Increase in inventories: In the restated financial statements, there is a significant increase in the inventories (86%) from 1 996 to 1997. However sales increase by only 9%. This mess to suggest that the company was over producing in 1 997 and supports the article’s allegation.

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