(20 marks) Question 4 Earnings Management I&N Pty Ltd have recently opened a new store in Sydney selling fashionable clothing, competing against retailers including David Jones and Myer. The managing director of I&N Pty Ltd, has invited you to become an investor in the business. You have been provided with the following statement of comprehensive income (all figures in thousands) relating to the first year of operations: Case: Statement of Comprehensive Income I&N Pty Ltd Year ended May 31, 2014 7,490 1,100 6,390 Sales revenue COGS Gross profit Operating expenses: Salaries expense Depreciation on equipment expense Rent expense Bad debts expense Other expenses Net profit 1,500 100 200 15 20 4,555 You have done some research on this business and found a number of potential concerns: To boost sales during the first year of operations, I&N Pty Ltd has extended easy credit to customers. Repayment is not required for 180 days at 0% interest. Many customers during the first 6 months of trading were very dissatisfied with product quality and are non-responsive when sent reminder letters concerning amounts due. The cost of inventory has increased substantially over the first year of operations as I&N sourced higher quality products. Much of the initial inventory is still in stock as customers choose to purchase the higher quality products now available. Your inquiries with the financial controller at I&N Pty Ltd indicate the following accounting methods are being used: First in, first out inventory costing Direct write off of bad debts