While students understand the motivations and mechanisms of channel-stuffing (described in the textbooks), they might not understand the limitations on the use of the technique (not described well in the textbooks) and whether Toshiba's use of the technique was different and effective.
We elaborate on these issues below.
Channel-stuffing, as a tool of earnings management, has three practical limitations. First, channel-stuffing in one period usually cannibalizes sales in the future periods and it inevitably leads to “sales” returns in the subsequent periods. Second, the customers have to be enticed with price discounts and attractive financing and, even then, they balk at buying excessive quantities. Third, channel-stuffing in the traditional form is unsustainable in the long run because it involves several areas of financial reporting—revenues, receivables, and inventories—that are closely scrutinized by auditors and financial analysts.
Toshiba faced no limitation on the quantities of PC parts “sold” to ODMs. The...