Peshawar Retailers Ltd. is a small corporation that has operated for two years. In early 2015, the CEO of the company, Nazir Kumar, signed an employment contract with the company that allowed him to earn a bonus if he increased Peshawar's gross profit margin by more than 3%. The draft income statement for 2015 has just been prepared and is shown below

The board of directors is about to meet and determine if Nazir is to be awarded his bonus. As one of the board members, you are surprised to receive an anonymous letter supposedly from a member of the accounting department that indicates that the CEO asked the staff member to do the following during 2015:
1. Record purchase returns of $7,000 as an increase of sales revenue.
2. Record freight of $5,000 paid on purchases of merchandise as an operating expense.
3. Record sales returns of $6,000 as an operating expense.
Instructions
(a) Assuming that the staff member is correct, determine if the CEO is eligible for his bonus.
(b) Did the adjustments requested by the CEO affect the profit margin?
(c) Based on the above, was any harm done to any users of the financial statements because of the adjustments made?

Transcribed Image Text:

2015 2014 Net sales Cost of goods sold $113,000 $80,000 48,000 32,000 8,000 Profit from operations 30,000 24,000 7,200 62,000 51,000 21,000 Operating expenses Income tax expense Profit 9,000 21,000 $16,800 40.0% Gross profit margin 45.1%