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 Extreme's return on assets (ROA) by 10% in the first year that he would resign.
3.Despite high revenues and high inventory turnover rates, Extreme's financial statements showed great losses. As such, Gil Gerrard has said that Paul must either resign or take a 40% salary cut.
4. Paul and Gil did not have an overly friendly relationship.
5.Paul feels that legal action is in order against Acme and has asked us to provide a briefing memo to his lawyer regarding the financial situation.
Constraints The most obvious constraint is the presence of generally accepted accounting principles (or GAAP), knowing that one must adhere to these principles. The second constraint is that Extreme is owned by Acme, and as such must prepare their financial statements for Acme, using Acme's objectives. This limits Extreme's ability to create their financial statements to be presented the way they would like to have them appear. In this case it is obvious that Paul Pistone would like to have his return on assets appear very high, or at least over 10%. However this is difficult to do because the statements are made for the parent company's individual objectives and not the objectives of Extreme.