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explain why ticheley may be using the strategy you mentioned above and support your 615065

Inferring reporting strategies

Excerpts from the financial statements of Ticheley Enterprises are as follows.

2012

2011

2010

Income Statement

Bad debt expense

$1,700

$2,900

$2,100

Net income

15,800

15,300

14,400

Balance Sheet

Account receivable

$27,400

$23,200

$23,100

Allowance for doubtful account (cr.)

2,100

3,000

2,300

Shareholders” equity

78,500

75,000

71,400

On December 27, 2011, Ticheley sent merchandise with a sales price of $8,500 to a major customer. The merchandise was in transit as of December 31. The cost of the inventory shipped was $2,900, and the company chose to record the sale and outflow of inventory on January 4, 2012, when the customer received the shipment. Ticheley”s management is compensated partially on an annual bonus, where all managers share equally in a $10,000 bonus pool if reported net income exceeds 20 percent of shareholders” equity.

REQUIRED:

a. Ticheley”s president recently stated in a letter to the shareholders that the company has reported profit increases consistently over the last three years. Comment on this statement.

b. Why would a company establish a management compensation system where a bonus is paid if reported income exceeds a certain percentage of shareholders” equity?

c. Identify any reporting strategy that Ticheley may be using, and support your position with calculations.

d. Explain why Ticheley may be using the strategy you mentioned above, and support your position with calculations.

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