Cleo Perfume, Inc. - Page 5

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          Incorrect Entry                                                             
               Mr. Rosales was not involved in the negotiations between               
          petitioner and ASA. He neither was informed nor independently               
          discovered that petitioner held the ASA inventory on consignment.           
          After taking a physical inventory of the goods in petitioner's              
          warehouse, Mr. Rosales mistakenly included the $2,031,778 ASA               
          consignment merchandise in petitioner's June 30, 1990, ending               
          inventory on petitioner's audited financial statements and credited         
          $2,031,778 to trade accounts payable (reflecting his belief that            
          petitioner had purchased the goods).  Mr. Rosales did not consult           
          with either Mr. Campos, Jr. or Sr., when making this entry.                 
          "Correcting Entry"                                                          
               Sometime in April 1991, Mr. Rosales questioned why the trade           
          account payable to ASA recorded on the books remained unpaid.  Mr.          
          Campos, Sr. informed Mr. Rosales that there was no payable due ASA.         
          Mr. Rosales then stated that he would correct the books and remove          
          the payable.  However, instead of debiting accounts payable and             
          crediting beginning inventory, Mr. Rosales debited accounts payable         
          and credited paid-in capital (reflecting his belief that the                
          shareholders had assumed the liability from the account payable to          
          ASA).  A physical inventory was taken at yearend June 30, 1991, and         

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Last modified: May 25, 2011