Problem

Bell Farm and Garden Equipment reported the following information for 2010:

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

Net Operating Income $ 705,398

Selected information from the balance sheet as of December 31, 2010, 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, 2010. 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, 2011. 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 2010 or 2011. 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, 2010, 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, 2011, instead of December 31, 2010?

c. Would the failure to record the customer return violate the AICPA Code of Professional Conduct?

d. If the president of the company refuses to correct the financial statements, what action should you take?