Extreme Sporting Goods Inc. Memo for the Lawyer of...

Role The role we are assigned in this case is to prepare a memo relating to the performance of Extreme Sporting Goods Inc. for the lawyer of current president Paul Pistone. This memo will be used to determine whether or not Paul has a valid legal case against the owner of the company, Gil Gerrard. Facts 1.Paul Pistone took over as president of Extreme Sporting Goods Inc. (Extreme), which is a company that manufactures sporting goods. 2.Paul signed a contract with the president of Acme Industries Corporation (Acme), Gil Gerrard, which stated that if Paul did not increase Extremes return on assets (ROA) by 10% in the first year that he would resign. 3.Despite high revenues and high inventory turnover rates, Extremes financial statements†¦show more content†¦Settlement packages were agreed upon and were very generous, including two years worth of salary and benefits for outgoing employees effective beginning July 1, 2006. However by December 31, 2006, the financial statements indicate that the entire $900,000 has been expensed, when only the amount expensed between July 1, 2006 and December 31, 2006 should have been reported. The rest should be reported over the following 18 months of the settlement agreement, and not all at once. The ultimate result of expensing the full amount of the settlement before it has been paid misrepresents total net income by making it higher than it truly is, which leads to a lower ROA. As Pauls lawyer it would be beneficial to exploit this point and argue that by representing net income in the way that they have, Acme is making Extremes ROA lower than it would be if the benefits were accrued properly. A third issue in the case has to do with the fact that when Acme needed cash for expansion they were able to borrow it debt-free from Extreme. Extreme was then short on money at times throughout the year and required an operating loan. By the end of the fiscal year Extreme had missed out on $270,000 in lost interest. This substantial amount would have been added to Extremes total net income, but the loan taken by Acme prevented this from happening. A lower net income would contribute to an