Bell Farm and Garden Equipment reported the following information for Year 2:

Net Sales of Equipment ..................................... $2,450,567
Other Income ............................................................... 6,786
Cost of Goods Sold ............................................... 1,425,990
Selling, General, and Administrative Expense ...... 325,965
Net Operating Income .......................................... $ 705,398

Selected information from the balance sheet as of December 31, Year 2, follows:

Cash and Marketable Securities ................................. $113,545
Inventory ......................................................................... 248,600
Accounts Receivable ........................................................ 82,462
Property, Plant, and Equipment—Net ......................... 335,890
Other Assets ....................................................................... 5,410
Total Assets .................................................................. $785,907

Assume that a major customer returned a large order to Bell on December 31, Year 2. The amount of the sale had been $146,800 with a cost of sales of $94,623. The return was recorded in the books on January 1, Year 3. The company president does not want to correct the books. He argues that it makes no difference as to whether the return is recorded in Year 2 or Year 3. Either way, the return has been duly recognized.

Required

a. Assume that you are the CFO for Bell Farm and Garden Equipment Co. Write a memo to the president explaining how omitting the entry on December 31, Year 2, could cause the financial statements to be misleading to investors and creditors. Explain how omitting the return from the customer would affect net income and the balance sheet.

b. Why might the president want to record the return on January 1, Year 3, instead of December 31, Year 2?