Diamond Food Case Essay examples

6605 Words Apr 18th, 2015 27 Pages
ISSUES IN ACCOUNTING EDUCATION Vol. 30, No. 1 2015 pp. 47–69

American Accounting Association DOI: 10.2308/iace-50948

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation
Mahendra R. Gujarathi
ABSTRACT: Diamond Foods is America’s largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case presents financial reporting issues around the commodities cost shifting strategy used by Diamond’s management to falsify earnings. By delaying the recognition of a portion of the cost of walnuts acquired into later accounting periods, Diamond Foods materially underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The primary learning goal
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Soon after incorporation, the Company began a series of acquisitions under the leadership of its Chief Executive Officer (CEO) Michael J. Mendes. The annual reports of the Company indicate that Diamond acquired, in May 2006, certain assets of Harmony Foods Corporation. In September 2008, it acquired Pop Secrett, a brand of microwave popcorn products, for $190 million cash from General Mills. In February 2010, Diamond acquired Kettle Brandt Chips, a premium potato chip company, for $615 million cash from Lion Capital LLP, U.K. The acquisitions, largely financed by long-term debt, have changed both the product as well as the risk profile of the company.2 Diamond’s transition from walnuts into the snack business was evinced in the falling percentage of walnuts sales as a percentage of total net sales. In fiscal 2006, 2007, 2008, and 2009, the percentage of walnut sales was 67 percent, 59.8 percent, 60.2 percent, and 47 percent, respectively.3 The transition is also manifested in how the company described its business. In the annual report for the fiscal year ending July 31, 2011 Diamond described its business as ‘‘an innovative packaged food company focused on building and energizing brands including Kettle Brandt Chips, Emeraldt snack nuts, Pop Secrett popcorn, and Diamond of Californiat nuts’’ (Diamond Foods 2006–2012) The acquisitions helped Diamond achieve impressive sales growth and profitability. The balance

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