The 1997 Annual Report of Sunbeam Corp. reported net income of $ 109.4 million, with sales of $ 1.2 billion. According to CEO €œchainsaw Al€ Dunlap, €œ we had an amazing year.€ Mr. Dunlap was well known from his previous CEO positions for dramatic cost cut-ting, including firing much of senior management. Sunbeam€™s share price had risen from $ 12.50 when he took over in July 1996 to $ 53 in March 1998.
However, in May 1998, when Sunbeam reported its first quarter 1998 results, the market was shocked by a loss of $ 44.6 million, compared with a profit of $ 6.9 million for the first quarter of 1997. Sales were reported as $ 244.5 million, down $ 9 million from the first quarter of 1997€” a decline of 3.6%. The company€™s share price quickly fell to $ 22. Reasons for this sudden decline in performance were analyzed by Jonathan Laing, writing in Barron€™s. Laing claimed that Sunbeam€™s 1997 earnings were €œlargely manufactured.€ A revised summary of his analysis of the after- tax effect on 1997 net income of discretionary accruals is given in the following table.

Required
a. Sunbeam reported that 1997 operating cash flow was €“$ 8.2 million. Do you agree with Laing€™s statement that 1997 earnings €œappear to be largely manufactured€? Explain why or why not.
b. Sunbeam had recently acquired several subsidiary companies, and had indicated that it would be recording a provision for restructuring of $ 390 million to integrate them into its operations. This suggests that Sunbeam still has scope to manage earnings. Use the earnings management tactics described by Hanna (Section 11.6.1 =) to explain how such a restructuring provision could be used to manage reported earnings.
c. Use the €œiron law€ of accruals reversal to help explain why there was a substantial first quarter 1998loss.

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Sunbeam Corp, 1997 Estimated Discretionary Accruals Effect on 1997 Net Income (S millions) (Net of tax) Increase Decrease Inventory written down to zero in 1996, sold at 50c on the dollar in 1997 Decline in prepaid expense from $404 in 1996 to $17.2 in 1997 Decrease in other current liabilities ($18.1 before tax) and other long-term liabilities ($19 before tax), attributed mainly to reduction in product warranty provisions. Reduction in 1997 amortization, due to 1996 writedown of property, plant and equipment, and trademark Capitalization of product development, advertising, etc. into property, plant and equipment in 1997 Decrease in allowance for doubtful accounts from $23.4 to $8.4 during 1997 Manufacturing for stock in 1997, evidenced by 40% increase in inventories, thereby absorbing manufacturing overhead of about Early buy" and "bill and hold" sales of $50: estimated profit from early revenue recognition 36.5 $15 10 10 105.5 15 5 90.5 15 Less total of Decrease column Net income-increasing discretionary accruals