Re: Case 03-05, Accounting Issues

Background
Trademark, Inc., a public and growing global corporation, creates, assembles, and disburses their products through four main divisions of their corporation: Greeting Cards and Stationery, Calendars, Party Goods, and Specialty Gifts. Their core business comes from their customers in drug stores and supermarket chains. In the early to mid 1990’s, Trademark saw significant growth in response to their IPO issuance in 1992, however, since 1994, they have seen a flat and ultimate declining growth in their product.

Issue

Recently, Trademark, Inc. has realized an overstatement in their return of damage goods and are considering halting their previously acceptable return of slow-moving merchandise for a full refund for some larger customers. What potential misstatements, if any, related to the issues identified should Nancy, Trademark, Inc.’s auditor, consider?

Analysis
(1) Return for Damaged Goods
Trademark, Inc. soon realized after shipping products to customers that the customers were displeased with their products. The boxes, in which the products were shipped in, were damaging their products, which in return caused customers to return Trademark, Inc.’s products. In response, Trademark changed shipping companies and fixed this problem for customers, ultimately lowering the amount of returns by customers. Should Trademark, Inc. follow their current company policy estimate of 25% or change to 22%? Option #1: Trademark, Inc. can maintain the current estimate of 25% on all returned damaged goods. Trademark, Inc. can continue to maintain their current estimate of 25% due to three important reasons: (1) current policy (2) immateriality of less than 5% of total sales and (3) cost-benefit analysis. The first important factor for maintaining the current estimate is the fact that Trademark, Inc.’s current policy