and Garden Equipment reported the following information for 2018: Net Sales of E
ID: 2566338 • Letter: A
Question
and Garden Equipment reported the following information for 2018: Net Sales of Equipment Other Income Cost of Goods Sold Selling, General, and Administrative Expense $2,450.567 6,786 1.425,990 325,965 Net Operating Income $ 705,398 Selected information from the balance sheet as of December 31, 2018, follows: Cash and Marketable Securities Inventory Accounts Receivable Property, Plant, and Equipment-Net Other Assets Total Assets $113,545 248,600 82,462 335,890 5,410 $785.907 Assume that a major customer returned a large order to Bell on December 31. 2018. 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, 2019. 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 2018 or 2019. 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, 2018, 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. Why might the president want to record the return on January 1, 2019, instead of December 31, 2018? b.Explanation / Answer
Ans: To
The Ceo
Non recognition of sales return will lead to higher gross profit and net income which would have a higher tax liability and the amount of excess net income will be equal to $ 52177 (i.e. 146800-94623) and it also affect balance sheet accounts as on the asset side accounts receivable will be overstated by $146800 and inventory will be understated by $ 94623. Thus non recognition of sales return will lead to fabricated balancesheet and willn't presented a true and fair view.
Ans 2: he might do so to inflate the profit and present a higher profit to attract investors and stakeholders.
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