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An Inventory Letter from Carter's to Kohl's--What Could Go Wrong?

Jeffrey Miller, Jeffrey Strawser
January 1, 2015
SKU:
BUS-004205
Region: 
North America
Topic: 
Strategy & General Management
Length: 
4 pages
Keywords: 
accomodations, discounts, inventory, letter of representation, perpetual method
Student Price: 
$4.00 (€3.44)
Average rating: 
0

Mr. Johnson had a highly valued business relationship with Mr. Elles. Johnson was the executive manager of Kohl’s Corporation’s profitable Children’s Division, while Elles served as Carter’s, Inc., executive vice-president of sales. All seemed to be going well until Elles asked Johnson to sign a letter that misstated the amount of Kohl’s discounts for the prior year’s purchases. These two executives had previously negotiated discounts totaling $16.5 million, which Kohl’s had already taken. The letter stated the amount of approximately $12.1 million, an understatement of $4.4 million. To Johnson, the signing of the letter apparently seemed like a necessary formality in order to maintain Kohl’s favorable discounts. Johnson also desired to keep Kohl’s and particularly its Children’s Division, as cost-effective as possible. Kohl’s financials would not be affected by the letter. What harm could come from signing the letter?

Learning Outcomes: 
  1. Illustrate the accounting for inventories, including accommodations, by a department store and its supplier using a perpetual inventory system
  2. Analyze the impact that recording the accommodations in the wrong accounting period has on the financial statements
  3. Evaluate the implications of signing a letter that misrepresents financial information of another company even though one’s own company is not impacted
  4. Appraise the difficulty of detecting a misstatement when collusion exists and the importance of conducting auditing procedures subsequent to the date of the financial statements