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Category: Business and Industry
Date Submitted: 01/11/2016 06:19 PM
thi79492_case1-4_017-020.qxd
12/21/07
4:05 AM
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Confirming Pages
1.4
Case
Sunbeam: The Revenue
Recognition Principle
Synopsis
In April 1996 Sunbeam named Albert J. Dunlap as its CEO and chairman.
Formerly with Scott Paper Co., Dunlap was known as a turnaround specialist
and was even nicknamed “Chainsaw Al” because of the cost-cutting measures he typically employed. Almost immediately, Dunlap began replacing
nearly all of the upper management team and led the company into an
aggressive corporate restructuring that included the elimination of half of its
12,000 employees and the elimination of 87 percent of Sunbeam’s products.
Unfortunately, in May 1998 Sunbeam disappointed investors with its
announcement that it had earned a worse-than-expected loss of $44.6 million in the first quarter of 1998.1 CEO and Chairman Dunlap was fired in
June 1998. In October 1998 Sunbeam announced that it would need to
restate its financial statements for 1996, 1997, and 1998.2
Sunbeam’s Customer Discounts and Other Incentives
and Sales to Distributors
Under GAAP, sales revenue can be recognized only if the buyer assumes the
risks and rewards of ownership of merchandise—for example, the risk of damage or physical loss. A sale with a right of return can be recognized as revenue
only if the seller takes a reserve against possible future returns. The size of this
reserve must be based on the company’s history with returns; the sales revenue
may not be recorded if no such history exists.
Beginning with the first quarter of 1997, Sunbeam began offering its customers discounts and other incentives if they placed their orders in the current
1
Robert Frank and Joann S. Lublin. “Dunlap’s Ax Falls—6,000 Times—at Sunbeam.” The Wall
Street Journal, November 13, 1996, p. B1.
2
GAO-03-138, Appendix XVII, “Sunbeam Corporation,” p. 201.
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18 Section One Fraud...