Case study help on 2a,b,c,d. ISSUES IN ACCOUNTING EDUCATION


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Case study help on 2a,b,c,d. ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 27, No. 3 DOI: 10.2308/iace-50080 2012 pp. 783–798 Max-Value Stores, Inc.: Financial Reporting of Gift Cards ABSTRACT: Max-Value Stores, Inc., a discount general merchandise operator, has initiated a program to sell its own gift cards and those of other retailers. This case provides an opportunity to apply your understanding of various financial reporting topics (revenue recognition, liability de-recognition, accounting changes, and deferred tax accounting) to determine the applicable GAAP (generally accepted accounting principles) for recognizing gift card ‘‘breakage,’’ the estimated amount of gift cards that is unlikely to be redeemed. You also must evaluate soundness of the proposals that the management of MVS has made during the process of annual audit to recognize estimated gift card breakage and estimated non-redemption of the restricted gift cards issued during the special Thanksgiving promotion. The case provides you an opportunity to examine several technical and conceptual financial reporting issues in a real-world setting, strengthen accounting research capabilities, understand implications of the choice of an accounting policy for performance measurement and financial statement analysis, and develop critical thinking and professional judgment skills. Keywords: gift cards; revenue recognition; gross vs. net; accounting changes; FASB codification; earnings management. CASE Company Overview Max-Value Stores, Inc. (MVS or the Company) is an operator of discount general merchandise stores in the southeastern United States. The Company’s stores generally serve low-, middle-, and fixed-income families that reside in small to medium-sized towns. Founded in 1969 in North Carolina with a single store, MVS has achieved significant brand recognition in its target markets and had grown to over 400 company-owned and 40 franchised stores by 2009. Supplemental materials can be accessed by clicking the links in Appendix A. Published Online: August 2012 783The Company’s strategy consists of meeting the general merchandise needs of its target customers by offering (1) a wider variety of quality merchandise and a more attractive price-to-value relationship than the smaller variety/dollar stores, (2) a shopper-friendly format that is more convenient than larger-sized discount merchandise stores, and (3) customer service, which exceeds that of both. MVS guarantees quality of all the products it sells and also offers extended service contracts on behalf of third parties on higher-priced items such as appliances and electronic products.1 Strategy and Performance Foreseeing a weakening retail environment, MVS started implementing a new strategy in the second half of fiscal 20072 focusing on enhancing its brand, improving operational performance, eliminating underperforming assets, and streamlining cost structure. This has enabled MVS to deliver higher sales and earnings in fiscal 2008 at a time when many other retailers experienced a decline. The financial analyst community is impressed with the past performance of MVS and has assigned a rating of Ab to the Company’s bonds (an investment grade rating from Moody’s) and a multiple of 18 to its current earnings, well above the multiples for national retailers such as Walmart or Target. Analysts are optimistic that the Company’s new strategy will further accelerate its revenue and earnings growth in the coming years. Analysts that follow MVS have an earnings estimate of $3.45 per share for fiscal 2008. The preliminary results for fiscal year 2008 (ending on February 28, 2009) indicate, however, that the Company would not meet analysts’ consensus earnings estimate. Tough credit markets in 2008 have made additional borrowings difficult and expensive for MVS. The senior management of the Company is particularly concerned that a debt covenant with one of its crucial lenders is likely to be…

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