MGAB02 ? 2014 FALL – CASE ASSIGNMENT 1

Micro Computer Warehouse Inc. (MCW) is a computer software and hardware online and
catalogue sales company listed on the Toronto Stock Exchange. The following press release was
issued to the public immediately after the release of its 2015 financial statements :
MICRO COMPUTER WAREHOUSE IS REORGANIZING TOP MANAGEMENT :
Micro Warehouse Computer Inc.(MCW) announced a ?significant reorganization? of its
management, including the reorganization of three senior executives.
The move comes immediately after the release of its 2015 financial statements which MCW
indicated it overstated earnings by $ 28 million as a result of accounting irregularities. That
previous disclosure prompted a flurry of shareholder lawsuits against the company. In addition,
MCW said it is cooperating with an ?informal inquiry? by the Securities and Exchange
Commission.
As MCW was finalizing its 2015 financial results, Wayne Smart, the Chairman of the Board of
Directors for MCW, was really shocked when the external auditor of MCW and the audit
committee told him the following. This triggered the action from the Chairman and the press
release above.
There is an understatement of purchases and trade payables in current and prior periods
amounted to $ 42 million.
There is a total of $ 5.3 million worth of software inventories that have been in stock for over
4 years and not likely going to be sold. The company has kept these inventories in the book
for the last few years thinking that there may be a chance that these inventories will be sold
but the sale never materialized.
The management improperly booked $ 2 million in revenue and $ 800,000 in income from a
purported sale of certain inventories to a distributor. The agreement provided that the
wholesaler could return all of the merchandize it did not sell and that MCW would pay all the
costs of shipment and storage.
Included in the asset is the net book value of the display obtained in 2010. In mid-2010,
MCW obtained an exclusive dealership for a line of computer accessories. The dealership
rights were for an initial five-year period, with five-year renewals possible at the option of
the manufacturer. At the time of signing the initial agreement, MCW was assured that a
renewal was virtually certain. MCW spent $1,600,000 to set up displays to promote the line.
These costs were capitalized and are being amortized over 10 years using straight line
depreciation. In December 2015, MCW learned that the exclusive dealership arrangement
won’t be renewed because it’s no longer part of the national chain. MCW won’t be able to sell
the products beyond April 2016.