Mitchem Lethbridge Ltd

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Case #2 Mitchem Lethbridge Ltd. Financial Statement Analysis Section A Introduction Mitchem Lethbridge Ltd. is an individual franchise of the parent company Mitchem Office Corporation, which holds a contest every third year to award the franchise with the greatest improvement in net income. This year the Lethbridge franchise has won the contest, however the Halifax franchise, who had a net income increase of 60%, contends that Lethbridge’s financial records have been manipulated to reflect higher net income numbers. The Mitchem head office has asked us to look at the financial records and interview the Lethbridge management to determine if an audit is required…show more content…
However, Jeff wrote inventory down to liquidation value which is what the inventory could be sold for immediately. This value is much lower that what it should have been written down to had the inventory’s value decreased since its purchase. Jeff also mentions in his notes that he was not sure that they were going to be able to sell the abnormally high level of inventory in the following months. This is a contradicting statement considering that Lisa had mentioned in her notes that she had planned the bulk sale in late 2010 and had even began advertising in December. She also estimated sales to be $150,000 in January which would have exceeded the inventory account before the write-down. This exaggerated write-down affected net income by decreasing the value of the inventory when the sales occurred in the following period. This would have reduced the cost of goods sold expense while sales and revenues remained unchanged by the write-down. This again shows that the Lethbridge division appears to have tried to decreases expenses in 2011 by increasing them in 2010, thereby bolstering their net income for the contest in 2011. The representational faithfulness and validity of Mitchem Lethbridge’s financial records are again brought into question because of this misleading information. Lease-break In 2010, Mitchem Lethbridge decide to moving, to breaking five years contract, Mitchem Lethbridge have to

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