The following financial information represents Hadley Company's first year of operations, 2011:

After reading Hadley's financial statements, you conclude that the company had a very successful first year of operations. However, after further examination, you note that the sales figure on the income statement was not adjusted for a bad debt expense. You also realize that a large percentage of Hadley's sales were the three customers, one of which, Litzenberger owes Hadley $50,000 as of the end of 2011.REQUIRED:a. Adjust the financial statements of Hadley Company to reflect a more conservative reporting with respect to bad debts. That is, establish a provision for the un-collectibility of Litzenberger's account. Recompute net income. How does this adjustment affect your assessment of Hadley's first year of operations?b. Why would auditors probably require that Hadley choose the more conservative reporting?c. Hadley's chief financial officer claims that no bad debt expense should be recorded, because Litzenberger is still conducting operations as of the end of 2011. How would you respond to thisclaim?

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Balance Sheet Income Statement S 5,000 85,000 40,000 $130,000 S 13,000 80,000 37,000 Sales S200,000 Cash Cost of goods sold Gross profit Expenses 102,000 S 98,000 65,000 Accounts receivable Other assets Total assets S 33,000 Current liabilities Long-term notes payable Sharebolders' equity Total liabilities and shareholders' equity Net income S130,000