Sleep King Manufacturing Company (SKMC) is a public manufacturing company specializing in the fabrication of mattresses. The company has been operating from its headquarters in Toronto since 1995. SKMC primarily sells to retailers, who in turn make final sales to customers. In 2020, the company reported net income of $100,000. The company has hired your firm, D & E Auditors, to conduct the year-end audit. As you are going through the financials, you come across a few accounting issues: 

a. On December 28, 2020, a large client ordered a shipment worth $20,000 of mattresses. The terms of the sale were F.O.B. destination. The order was shipped on December 30, 2020, and the client received the mattresses on January 2, 2021. Management decided to report the revenue in the fiscal year of 2020 since the inventory left the building in 2020.

b. The company decided to change the useful life of the manufacturing machinery purchased 10 years ago from 15 years to 20 years. Management stated the machinery was still running well.

c. The company decided to reduce the allowance for doubtful accounts (ADA) from 8% of credit sales to 5% of credit sales. Management stated that it believes the new estimate more reliably represents its percentage of uncollectible amounts.

d. The company decided to change its accounting policy for inventory from the moving average-cost method to the FIFO method. In January 2020, SKMC decided to set the annual management bonus based on net income. The bonus is set to 5% of reported net income at the end of the year.

Required:

a. As the auditor of SKMC, which of the above issues would you be most concerned about and why?

b. Based on the information above, would you say that the quality of earnings of SKMC is high or low? Why?

c. What problems do you see arising from the extensive use of estimates in accrual accounting?

d. Between the balance sheet, income statement, and cash flow statement, which financial statement do you believe is least affected by estimates? Explain your reasoning.