Ic$21\mathrm{.}2$

Sunlight Equipment Manufacturers $($SEM$)$ makes barbecue equipment. The company has historically been very profitable; however, in the last year and a half, things have taken a downturn due to higher consumer interest rates and a slowdown in the economy. On its $2023$ draft year$-$end statements, the company is showing a break$-$even position before any final year$-$end adjustments. The company fired its CEO, Sam Lazano, at the beginning of the year and a turnaround specialist, Agneta Lundstrom, was hired. Agneta has a reputation of being able to come into companies that are unprofitable and performing poorly and make them profitable within two years. Agneta has agreed with SEM$$s board of directors that she will be paid a $$1-$million bonus if the company has a combined two$-$year profit of $$5$ million by the end of $2024.$

Among other things, Agneta instituted a more aggressive sales policy for SEM$$s customers, who are mainly retailers, as well as a new remuneration policy for sales staff. Agneta attributed the company$$s poor performance to untrained sales staff whose remuneration and bonus plan were not properly aligned to maximize sales. Under the new remuneration policy, sales staff members are paid a salary as well as a bonus, which is a percentage of gross sales at year end. The sales staff has responded well and sales have increased by $20\%.$

The new sales policy is as follows:

$-$ Cash down payment of $20\%,$ with the remaining payment for shipments due once the barbecues are sold by the customer $($retailer$)$ to a third party.

$-$ If a customer doubles its normal order, no down payment is required.

$-$ The barbecues may be stored on the premises of SEM. Many customers have taken the company up on this offer in order to double the size of their purchase.

$-$ Any unsold barbecues are allowed to be returned after year end.

Under the new policy, sales have increased dramatically, with many customers taking advantage of the new terms. As at year end, legal title to all barbecues has passed to the customers. Only customers with an excellent credit history have been allowed to purchase under the new policy. The company has accrued bonuses for almost its entire sales staff.

The increased profits from these sales have been offset by the accrual of $$500,000$ for Agneta$$s bonus. She is very confident that she will be able to turn the company around and so has accrued part of her bonus. She has also decided to change several accounting policies, including the following:

$-$ Depreciation on machinery switched to straight$-$line from double$-$declining$-$balance. The equipment is about two years old with an estimated life of $10$ years. Agneta believed that the double$-$declining$-$balance method was arbitrary and noted that several of SEM$$s competitors use the straight$-$line method. Machinery is most useful when new because it requires less downtime for fixing.

Another problem that Agneta had identified was in inventory management. Agneta was convinced that inventory was being stolen and$/$or $$lost$$ due to poor tracking. SEM hired a company, Software Limited, to install a new inventory tracking system during the year. Midway through the year, Software went bankrupt and was not able to finish the installation. The installation was a customized job and, as at year end, the system was not functioning yet. SEM has not been able to find a company to replace Software. To date, $$2$ million has been spent on the new system. Agneta had capitalized the costs and noted she was confident that she could find a company that could successfully complete the installation.

$1.$ Provide a Case Overview

$2.$ What kind of biases exist in the reporting of financial statements and why?