Question:

Brian Darkes is CFO of Adams Pottery Company which produces wedding vases. It's near year-end and Brian predicts that the net income for the year is not going to be as large as he has hoped. Because of the global pandemic, weddings have been dramatically downsized, postponed, or canceled and demand for wedding vases is way down. Concerned that the bank would question the lower reported net income, Brian decides to reduce the percentage used to estimate uncollectible accounts for the current year from 5 percent of credit sales to 1 percent of credit sales although bad debts have always been approximately 5 percent of the current year credit sales. The current year credit sales are $6,587,000.

Required:

1. (2 points) What is the effect on income before taxes of the percent change planned by Brian?

2. (2 points) What is the effect of the percent change on the total assets?

3. (1 point) Is this practice ethical? Should Brian reduce the percentage? Who are the parties affected if the percentage is reduced? Explain your answer.