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Question 33 Nazir Khan, the CEO of Peshawar Inc., signed an employment contract with the company that allowed him to earn a bonus if he
Question 33 Nazir Khan, the CEO of Peshawar Inc., signed an employment contract with the company that allowed him to earn a bonus if he increased Peshawar's gross profit margin by more than 3%. The draft income statement for 2018 has just been prepared and is shown below. 2018 2017 Net sales $105,465 $77,000 Cost of goods sold 56,386 45,430 Gross profit 49,079 31,570 Operating expenses 20,435 7,700 Income from operations 28,644 23,870 Income tax expense 8,593 7,161 Net income $20,051 $16,709 Gross profit margin 46.5% 41.0% The board of directors is about to meet and determine if Nazir is to be awarded his bonus. As one of the board members, you are surprised to receive an anonymous letter, supposedly from a member of the accounting department, that indicates that the CEO asked the staff member to do the following during 2018: 1. Record purchase returns of $6,990 as an increase of sales revenue. 2. Record freight of $5,120 paid on purchases of merchandise as an operating expense. 3. Record sales returns of $6,075 as an operating expense. Assuming the staff member is right, correct the above adjustments and recalculate the gross profit margin. (Round answers to 1 decimal place, e.g. 15.2.) Gross profit margin draft % Gross profit margin revised % Is the CEO is eligible for his bonus? Did the adjustments requested by the CEO affect the profit margin? (Round answers to 1 decimal place, e.g. 15.2.) % which is the profit margin in 2018 is amounts. from the prior year. However, in the first draft of the income statement, the profit margin was %, which is than the % determined using the correct Based on the above, was any harm done to any users of the financial statements because of the adjustments made
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