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ABSTRACT: Blockbuster Video is a case study that covers the matching principle, ordinary vs. extraordinary income, amortization of goodwill and the relationship between accounting information and market efficiency. Instructors of Intermediate Accounting I or other junior-level accounting courses should find the level of difficulty of the accounting principles and the related issues addressed in the case appropriate for their students.
Students should be able to develop their analytical skills by researching the official accounting pronouncements through the Financial Accounting Research System (FARS) or other sources of authoritative literature that are related to each accounting issue. This process should allow students to better understand the different alternatives which pertain to each accounting issue, and to perceive the key factors relevant in evaluating each alternative.
The video rental industry was one of the fastest growing industries in the U.S. during the 1980s. Industry revenue grew from an estimated $700 million in 1982 to $10.2 billion in 1990. The $10.2 billion revenue in 1990 was almost twice Hollywood's box office receipts! Yet, the industry remained quite fragmented with approximately 30,000 video stores and 20,000 outlets in grocery stores, gas stations, convenience stores and other merchants.
In 1988, Blockbuster Entertainment Corporation began to receive increased attention from investors by showing very rapid growth and distinguishing itself from other outlets and video chains by maintaining much larger inventories than its competitors. Blockbuster's sales grew from $8.1 million in 1986 to $136.9 million in 1988 (see table 1). As a result, the stock price increased 354 percent in 1988 alone!
Blockbuster's stock price continued its upward rise by an additional 69 percent during the first four months of 1989 because of continuing increases in sales and earnings. The upward rise came to an abrupt halt that year on May 9, however, when Lee J. Seidler, a senior managing director and accounting analyst for Bear Stems & Company, released a report titled, "Blockbuster: The Accountants Earn their Pay." Blockbuster's stock price dropped more than ten percent on extremely heavy volume of 1.5 million shares. Blockbuster was the fifth most active issue on the New York Stock Exchange that day (Lowenstein 1989).
THE SEIDLER REPORT
In the report, Seidler stated that much of the earnings growth experienced by Blockbuster during 1988 was...