Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 7

On January 4, 2005, Krispy Kreme Doughnuts Inc. announced it would restate its financial statements for the 2004 fiscal year. The restatement, the company said, was due to errors in how it accounted for the repurchase of franchises. It explained that such a restatement could reduce its earnings by seven to eight cents a share and cause the company to default on its credit agreement. The company’s stock price fell $1.83 that day, or about 15 percent. Explain what you believe to be are the factors that cause a company’s stock price to decline by a significant amount on the day of the announcement of a restatement of earnings. That is, what motivates shareholders to sell of their stock holdings after announcements such as that at Kristy Kreme?

Step 1 of 2

Financial statement:

The financial statement is the statement of the company position at a particular time period.