Case 2-1 Zodiak, Inc.
Executive Summary
NOTE THIS IS JUST ONE EXAMPLE OF HOW AN EXECUTIVE
SUMMARY MIGHT BE STRUCTURED. YOU ARE FREE TO USE ANY
FORMAT YOU DEEM APPROPRIATE TO THE CASE.
BUAD 658
Team Members:
Elton John
Olivia Newton John
Farmer John
ZODIAK, INC.
Office of the Controller
Date:
March 15, 2020
To:
Chairperson of the Board of Directors
From:
Meg Walters, Corporate Controller
Subject:
Fiscal 2020 Accounting Issues
At your request, I have prepared this executive summary outlining a number of
accounting issues for fiscal 2020 which have come to my attention. Of particular concern are the
following two situations:
1. At the end of 2020, Zodiak booked sales revenues of $2 million when we shipped product
to some of our regular customers even though these customers had not ordered the goods.
Our sales people told the customers they could return the product in 2021 for a full refund
if they didn want the product, but we have made no provision for any return of sales in
our accounting records.
I believe most, if not all, of our customers will return the
unwanted goods in 2021, and although we may be able to eventually sell this product, our
financial statements for 2020 will be incorrectly presented as noted in the attached
restatements. Specifically, the sales revenues and cost of goods sold line items in our
2020 Income Statement are overstated by $2 million and $853,000, respectively.
Likewise, accounts receivable and inventory on our 2020 Balance Sheet are overstated by
$2 million and understated by $853,000, respectively. When I asked Mr. Skilling about
this, he stated that our accounting complied with generally accepted accounting principles
(GAAP); however, the practice outlined above violates one of the basic standards
governing accrual basis accounting, the revenue realization (or recognition) principle.
This principle dictates when revenue is to be recognized and reported. In general, we
should only recognize revenue and report it on our income statement when we exchange
our goods and services for cash or claims to cash (i.e. accounts receivable). Since the
customers described in the situation above did not order the product, clearly no legitimate
exchange took place. When I confronted Mr. Skilling with this fact, his response was
(e sales would %lp4he 2020 numbers.². We added the $1 million cost of corporate reorganization to the balance of our property,
plant, and equipment account(describe the second irregularity similar to #1).
In summary, I believe(comment on the overall impact of the accounting irregularities on
the firmà2020 financial performance and its financial position as of December 31, 2020).
Case 2 Spreadsheet Template — Zodiak, Inc.
Income Statements
For the Years Ended December 31 (in thousands)
As Recast
2020
Adjustments
Sales revenues
Cost of goods sold
Gross pro t
Selling, general, and administra ve expenses
Deprecia on expense
Research and development expense
Opera ng income
Interest expense
Net income
Balance Sheets
December 31 (in thousands)
Statements as Originally Presented
2020
2019
2018
US$ 35.735
15.241
20.494
9.270
645
660
9.919
1.200
US$ 8.719
As Recast
2020
Adjustments
US$ 31.906
13.608
18.298
8.427
640
756
8.475
1.200
US$ 7.275
As Presented
2020
2019
Assets
Cash
Accounts receivable
Inventory
Other current assets
Current assets
US$ 5.728
7.047
5.812
1.649
20.236
US$ 2.123
6.282
4.531
134
13.070
Property, plant, and equipment
Total Assets
33.067
US$ 53.303
34.737
US$ 47.807
US$ 4.253
889
5.142
US$ 3.402
846
4.248
20.000
25.142
20.000
24.248
20.000
8.161
28.161
US$ 53.303
20.000
3.559
23.559
US$ 47.807
Liabili es
Accounts payable
Accrued liabili es
Current liabili es
Notes payable
Total Liabilites
ti
ti
ti
ti
fi
ti
ti
ti
Shareholders’ Equity
Common stock
Retained earnings
Total shareholders’ equty
Total Liabili es and Shareholders’ Equity
US$ 30.100
12.840
17.260
8.025
625
700
7.910
1.200
US$ 6.710
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