9.59 Toying around with the Numbers. Mattel Inc., a manufacturer of toys, failed to wrie off obsolete inventory, thereby overstating inventory and improperly deferred tooling costs both of which understated cost of goods sold and overstated income. "Excess" inventory was identified by comparing types of toys (wheels, general to oys dolls, and games), parts, and raw materials with the forecasted sales or usage; lower-of-cos or-market (LCM) determinations then were made to calculate the obsolescence write-off Obsolescence was expected and the target for the year was $700,000. The first comparison computer run showed $21 million "excess" inventory! The company "adjusted" the forecast the quantities of expected sales for many toy lines. (Forty percent of items had forecasted sales more than their actual recent sales.) Another "adjustment" was to fore- cast toy closeout sales not at reduced prices but at regular prices. In addition, certain parts were labeled "interchangeable" without the normal reference to a new toy product. These adjustments to the forecast reduced the excess inventory exposed to LCM valuation an write-off. The cost of setting up machines, preparing dies, and other preparations for man u- facture are tooling costs. They benefit the lifetime run of the toy manufactured. The con- pany capitalized them as prepaid expenses and amortized them in the ratio of current-year sales to expected product lifetime sales (much like a natural resource depletion ca To lower the amortization cost, the company transferred unamortized tooling costs fro with low forecasted sales to ones with high forecasted sales. This caused the year s an tion ratio to be lower, the calculated cost write-off lower, and the cost of goods sold lo than it should have been. m toys wer The computerized forecast runs of expected usage of interchangeable parts provided a space for a reference to the code number of the new toy where the part would be used. Some of these new toy. In other business cases of toy sales and parts usage contained the quantity on hand, not a forecast number references contained the code number of the part itself, not a In the tooling cost detailed records, unamortized cost was classified by lines of toys (similar to classifying asset cost by asset name or description). Unamortized balances were carried forward to the next year. The company changed the classifications shown at the prior year-end to other toy lines that had no balances or different balances. In other words, the bal- ances of unamortized cost at the end of the prior year did not match the beginning balances of the current year except for the total prepaid expense amount. For lack of obsolescence write-offs, inventory was overstated at $4 million. The company recorded a $700,000 obsolescence write-off. It should have been about $4.7 million, as later determined. The tooling cost manipulations overstated the prepaid expense by $3.6 million The company reported net income (after taxes) of $12.1 million in the year before the manipulations took place. If pretax income were in the $20 to $28 million range in the year nce and tooling misstatements alone amounted to about of the misstatements, the obsolesce 32 percent income overstatemernt 9.59 Toying around with the Numbers. Mattel Inc., a manufacturer of toys, failed to wrie off obsolete inventory, thereby overstating inventory and improperly deferred tooling costs both of which understated cost of goods sold and overstated income. "Excess" inventory was identified by comparing types of toys (wheels, general to oys dolls, and games), parts, and raw materials with the forecasted sales or usage; lower-of-cos or-market (LCM) determinations then were made to calculate the obsolescence write-off Obsolescence was expected and the target for the year was $700,000. The first comparison computer run showed $21 million "excess" inventory! The company "adjusted" the forecast the quantities of expected sales for many toy lines. (Forty percent of items had forecasted sales more than their actual recent sales.) Another "adjustment" was to fore- cast toy closeout sales not at reduced prices but at regular prices. In addition, certain parts were labeled "interchangeable" without the normal reference to a new toy product. These adjustments to the forecast reduced the excess inventory exposed to LCM valuation an write-off. The cost of setting up machines, preparing dies, and other preparations for man u- facture are tooling costs. They benefit the lifetime run of the toy manufactured. The con- pany capitalized them as prepaid expenses and amortized them in the ratio of current-year sales to expected product lifetime sales (much like a natural resource depletion ca To lower the amortization cost, the company transferred unamortized tooling costs fro with low forecasted sales to ones with high forecasted sales. This caused the year s an tion ratio to be lower, the calculated cost write-off lower, and the cost of goods sold lo than it should have been. m toys wer The computerized forecast runs of expected usage of interchangeable parts provided a space for a reference to the code number of the new toy where the part would be used. Some of these new toy. In other business cases of toy sales and parts usage contained the quantity on hand, not a forecast number references contained the code number of the part itself, not a In the tooling cost detailed records, unamortized cost was classified by lines of toys (similar to classifying asset cost by asset name or description). Unamortized balances were carried forward to the next year. The company changed the classifications shown at the prior year-end to other toy lines that had no balances or different balances. In other words, the bal- ances of unamortized cost at the end of the prior year did not match the beginning balances of the current year except for the total prepaid expense amount. For lack of obsolescence write-offs, inventory was overstated at $4 million. The company recorded a $700,000 obsolescence write-off. It should have been about $4.7 million, as later determined. The tooling cost manipulations overstated the prepaid expense by $3.6 million The company reported net income (after taxes) of $12.1 million in the year before the manipulations took place. If pretax income were in the $20 to $28 million range in the year nce and tooling misstatements alone amounted to about of the misstatements, the obsolesce 32 percent income overstatemernt