Question:

Deal More Save More Limited $($DMSM$)$ is a chain of retail stores across Canada. DMSM sells a wide

range of kitchen and hardware items, cleaning supplies, snacks and seasonal items that it obtains from

major manufacturers and wholesalers. DMSM$\text{'}$s strategy has long been to deliver consumer value and

convenience by offering everyday name brand products with low prices and good value in convenient

neighborhood location. The company is wholly owned by Samuel and Michele Lees, who founded it

many years ago. In recent years, the Lees have not been involved in managing the company but have

hired professional managers. The Lees currently live in the Cayman Island and rely on the cash flow

generated by DMSM to live on$.$

DMSM has gone through significant changes in their operations. A year ago, the Lees hired Joseph

Warden as the chief executive officer of the company to help turn the company around after a number

of unprofitable years. At the time Joseph was hired, the Lees were worried that DMSM would go

bankrupt and they would lose their main source of income. Joseph was well known as an excellent

"turnaround" manager, and the Lees were prepared to pay for someone who could reverse the current

financial status of their business. The Lees agreed to pay Joseph a salary plus a bonus of $25$ percent of

net income $($in accordance with ASPE$)$ in each year of a three$-$year contract. DMSM$\text{'}$s tax rate is $40\%.$

In his first year with DMSM$,$ Joseph made significant improvements in the strategic direction of the

business. In addition to adding online shopping and corporate clients, DMSM new business strategy

is to provide customers with a consistent value add shopping experience, offering a broader assortment

of national brand$-$named merchandise, consumables and seasonal items. Products are available in

individual or multiple units at low, fixed price points. This allowed DMSM to compete with large

retail chain stores such as Costco and Walmart.

Joseph is thrilled to complete the inaugural year under his guidance. He estimated that his bonus this

year could reach to $$60,000.$ After hiring Joseph, the Lees feel confident about the viability of DMSM$.$

Joseph has just presented the financial statement for the current year to the Lees for their approval. The

Lees are pleased about DMSM$\text{'}$s profitability, but they are concerned about some accounting treatments

that appear to have contributed to the significant increase in net income. Here are the items noted

below: ANSWER THIS QUESTION: To attract more customers, Joseph has begun offering credit to specific Corporate customers. At

the end of the year, the accounts receivable balance reached $$150,000.$ He has not, however,

recorded an allowance for bad debt for the period. He believes there is no need to estimate bad

debt expense since he only provides credit to customers that have a long$-$standing relationship

with DMSM and has gone through an extensive credit review and pass with flying colours. The industry averages $10\%$ of ending accounts receivable as an appropriate allowance for doubtful

account for this type of industry. FOLLOW THIS CRITERIA: You are a CPA who is also a good friend to the Lees. The Lees have come to you for advice on the

above accounting issues. They are concerned that Joseph's accounting choices will result in him

receiving a bonus that does not reflect his actual performance as CEO and unreasonably reduce the

amount of money that the Lees receive from DMSM$.$ Lastly, the Lees has asked you to suggest three

key ratios that should be included in Joseph$$s performance evaluation. They don$$t want you to provide

the calculation but rather an explanation to why these three should be part of Joseph$$s bonus

calculation.

Required:

Prepare a report for the Lees providing them with the advice they seek. Please use the following framework:

$$ You need to provide an analysis of users and their strategic objectives.

$$ In analyzing each issue in the case, follow the case analysis approach discussed in class

namely the $$I$/$A$/$A$/$R$$ approach to case writing. I$=$ Identify the Issue; A$=$ Analyze why it$$s

an issue; A$=$ Alternatives, if any; and R$=$ Recommendation.

$$ In your recommendation, ensure you clearly indicate your recommendation, discuss the

impact of your recommendation to users$$ needs and objectives and calculate the financial

impact, if any.

$$ In the role of the CPA advisor, students must assess each financial reporting issue, recalculate

the net income, and estimate the revised bonus payable $($if any$).$