The following financial information represents Hadley Company€™s first year of operations, 2017:

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 to three customers, one of which, Litzenberger Supply, is in very questionable financial health, although still in business. Litzenberger owes Hadley $50,000 as of the end of 2017.

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 uncollectibility 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 2017. How would you respond to this claim?

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Income Statement Balance Sheet $ 5,000 $200,000 Cash Sales Cost of goods sold Accounts receivable 102,000 85,000 $ 98,000 Gross profit Property, plant, and equipment 40,000 Operating expenses $130,000 Total assets 65,000 $ 33,000 Net income Accrued payables $ 13,000 Notes payable 80,000 Shareholders' equity 37,000 Total liabilities and shareholders' equity $130,000