Mattel,Inc Required:
A

Essay

Mattel,Inc.designs,manufactures and markets various toy products worldwide through sales to retailers and directly to consumers.Among the company's many products are Barbie,GI Joe,and American Girls.Below is an income statement for Mattel for years 2002,2001 and 2000.Notes to the financial statements reveal the following information.
1.Discontinued Operations - In 1999 Mattel merged with Learning Company,with Mattel being the surviving company.The Learning Company,which produced consumer software,represented a separate line of business for Mattel.In 2000 Mattel's Board of Directors committed to dispose of the Learning Company and its consumer software operations.In 2000 the Learning Company was reported as a discontinued operation and the company was sold to Gores Technology on October 18,2000.
In 2002 Mattel received a contractual payment from Gores Technology based on the sale of assets of Learning Company and other liquidation events.
2.Accounting Change - In 2001 Mattel changed the manner in which it accounted for derivative instruments consistent with the issuance of SFAS No.133 Accounting for Derivative Instruments and hedging Activities.The change resulted in Mattel recording a one-time adjustment of $12 million.
3.Accounting Change - In 2002 the FASB issued SFAS No.142 Goodwill and Other Intangible Assets.The standard requires that management estimate the value of its goodwill and,if necessary,record an impairment charge.Consistent with SFAS No.142 Mattel recorded a one-time adjustment of $252.2 million,net of tax,as the cumulative effect of the change in accounting principle.

$\begin{array} { l l l l }\text { Mattel, Inc.}\\\text { Selacted Income Statement data}\\ \text { Fiscal year end } & 12 / 12002 & 12 / 31 / 2001 & 12 / 31 / 2000 \\ \text { (amounts in thousands of dollars) } & & & \\ \text { Net sales } & 44,885,340 & 34,687,924 & 54,565,499 \\ \text { Cost of Goods Sold } &\underline{ ( 2,524,353 ) }& \underline{( 2,538,990 ) }&\undereline{ ( 2,572,247 )} \\ \text { Gross profit } & 2,360,987 & 2,148,934 & 1,993,242 \\\\\text { Selling and Administrative Expenses } & (1,602,846) & (1,507,793) & (1,560,157) \\\text { Amortization of Goodwill } & 0 & (46,121) & (46,561) \\\text { Non-operating incomelexpense } & (22,747) & (9,878) & (8,121) \\\text { Interest expense } & \underline{(113,897)} & \underline{(155,132)} &\underline{ (152,979)}\\\text { Income from Continuing Operations }\\\text { before Income Taxes } & 621,497 & 430,010 & 225,424 \\\text { Provision for income taxes } &\underline{ (166,455)} &\underline{ (119,090)} &\underline{ (55,247)} \\\text { Income from Continuing Operations } & 455,042 & 310,920 & 170,177 \\\text { Gain (Loss) from Discontinued Oper., net of tax } &\underline{ 27,253} & &\underline{ (601,146)} \\\text { Income (Loss) before Cumulative Effect of } & 482,295 & 310,920 &(430,969)\\\text { Change in Accounting Principles }\\\\\text { Cumulative Effect of Change in Accounting }\\\text { Principles, net of tax } &\underline{ ( 252,194 ) }&\underline{ ( 12,001 )} & \underline{0} \\ \text { Net Income (Lass) } & \underline{230.101} & \underline{298.919 }& \underline{( 430.969 )}\end{array}$


Required:
a.Discuss whether or not you would adjust for each of the following items when using earnings to forecast the future profitability of Mattel:
(1)Discontinuance of the Consumer Software operations.
(2)The change in accounting for derivative instruments.
(3)The change in accounting for goodwill and other intangible assets.
b.Indicate the adjustment you would make to Mattel's net income for each of the items in part a.
c.Prepare a common size income statement for 2002,2001,and 2000 for Mattel.
d.Repeat part c after making the income statement adjustments in part b.
e.Assess the changes in profitability of Mattel during the three-year period.
a.