Answer Happy

Please help with the questions below on the case study
of forensic accounting (please highlight important points
that happened in the case study to understand better):
Crisp-Drinks is a California corporation headquartered in San
Diego, California, United States. Crisp-Drinks’ common stock is
registered with the Securities and Exchange Commission.
Crisp-Drinks is engaged in the marketing, manufacturing, and
distributing Crisp-Drinks beverages nationally. Historically,
Crisp-Drinks has had three drinks representing the largest source
of operating revenue. These are: YumCoffee, AlcalWater, and
FuzJuice. Crisp-Drinks has consistently met or exceeded earnings
expectations while achieving annual earnings per share growth rate
of more than twice the average growth rate of the SP 500.
Crisp-Drinks’ superior earnings performance has resulted in its
common stock trading at a price to earnings multiple twice that of
the SP 500’s.
In recent years, Crisp-Drinks has begun experiencing increased
competition and a more difficult economic environment.
Nevertheless, Crisp-Drinks continuously has issued press
releases that its expected earnings per share will continue to grow
between ten percent and twelve percent annually.
For the purpose of generating additional revenues to meet both
annual business plan and earnings targets, close to the fiscal
year-end, Crisp-Drinks asked its bottlers to make additional
purchases of YumCoffee and FuzJuice. Even though the bottlers knew
that these additional purchases exceeded the forecasted demands for
these drinks, the bottlers continued to purchase these drinks to
preserve their relationship with Crisp-Drinks. This practice
authorized and implemented by the company’s management, effectively
allowed Crisp-Drinks to meet Wall Street’s expectations.
Furthermore, to entice bottlers to purchase more of the high margin
drinks, Crisp-Drinks extended more favorable credit terms than
usual, typically increasing payment terms from just ten days to
thirty days.
Additionally, the bottlers were not allowed rights to return any
drink. CrispDrinks did not necessarily collect all receivables due
from its bottlers nor did it record appropriate allowances for
doubtful accounts, especially given these generous credit terms.
The effect of selling to the bottlers without right of returns
moved revenues from future periods to the current period. As a
result, Crisp-Drinks has had a sales deficit at the beginning of
each fiscal year simply because bottlers had more than they can
sell already, so their inventory of unsold drinks was carried
forward. To further maintain and achieve earnings targets, and to
maintain an illusion of strong demand on these drinks, especially
in years of increased competition, Crisp-Drinks overstated its
inventories of YumCoffee and FuzJuice.
Over time, employees communicated that maintaining sales was not
sustainable and sales had to decrease or cease entirely. As a
result, Crisp-Drinks entered into round-trip transactions with
Drinks America Corp. (DAC). DAC is wholly-owned by VP of operations
of Crisp-Drinks.
These transactions were approved by the CEO of Crisp-Drinks and
its VP of operations (i.e., the VP of operations was entering into
these transactions as the owner and CEO of DAC). Over a period of a
few years, DAC appeared to become the largest direct customer of
Crisp-Drinks. The transactions between the company and DAC entailed
the following: Crisp-Drinks promised to ship YumCoffee, AlcalWater,
and FuzJuice to DAC at a future date. DAC agreed to transfer cash
to Crisp-Drinks for the future purchases. Crisp-Drinks then
recorded the cash as loan payable for sales to take place in future
periods. Subsequently, Crisp-Drinks issued credit memos for sales
returns that were recorded as purchases of inventory of raw
material such as sugar, coloring agents, and flavors from DAC. As
of the last few fiscal year-ends, no drink was actually shipped out
to DAC.
To reduce its manufacturing costs, and due to potential
increased government regulations that encourage and subsidize clean
energy manufacturing practices, the company considered upgrading
its manufacturing equipment. Crisp-Drinks entered into an agreement
with a solar-power energy-efficient equipment manufacturer. Under
the two-year agreement, the company would use the manufacturing
equipment in its facilities for an annual fee. Crisp-Drinks
reported this equipment on its balance sheet and described clearly
the use of the equipment in its footnotes to property, plant, and
equipment.
Moreover, to improve its cash flows from investing activities,
Crisp-Drinks entered into a memorandum of understanding (MOU) to
trade real estate with an Irish company. The Irish company would
acquire and trade the real estate properties for sale in Europe for
the benefit of Crisp-Drinks. Under the MOU, Crisp-Drinks did not
acquire the real estate. In its most recent year financial
statements, Crisp-Drinks listed investment in real estate in
Europe.
Examining the company’s financial statements, Crisp-Drinks did
not disclose any information from which investors could determine
the impact of the agreements with bottlers on current earnings, or
the likely impact on future earnings. Additionally, Crisp-Drinks’
notes to the financial statements were vague at best or silent at
worst about the transactions between the company and DAC and the
Irish company.