Written Assignment, Critical Thinking Effect of sales returns on financial statements
Bell Farm and Garden Equipment reported the following information for 2012:
Net sales of equipment | $ 2,450,567 |
Other income | 6,786 |
Cost of goods sold | (1,425,990) |
Selling, general, and administrative expense | (325,965) |
Depreciation and amortization | (3,987) |
Net operating income | $ 701,411 |
Selected information from the balance sheet as of December 31, 2012 follows:
Cash and marketable securities | $113,545 |
Inventory | 248,600 |
Accounts receivable | 82,462 |
Property, plant, and equipment—net | 335,890 |
Other assets | 5,410 |
Total assets | $785,907 |
Assume that a major customer returned a large order to Bell on December 31, 2012. The amount of the sale had been $146,800 with a cost of sales of $94,623. The return was recorded in the books on January 1, 2013. The company president does not want to correct the books. He argues that it makes no difference as to whether the return is recorded in 2012 or 2013. Either way, the return has been duly recognized.
Required
a. Assume that you are the CFO for Bell Farm and Garden Equipment Co. Write a memo to the president explaining how omitting the entry on December 31, 2012. could cause the financial statements to be misleading to investors and creditors. Explain how omitting the return from the customer would affect net income and the balance sheet.
b. Why might the president want to record the return on January 1. 2013. instead of December 31, 2012?
c. Would the failure to record the customer return violate the AICPA Code of Professional Conduct? (See Exhibit 2.9 in Chapter 2.)
d. If the president of the company refuses to correct the financial statements, what action should you take?
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