Excerpts from the financial statements of Ticheley Enterprises are provided below. 1997 1996 1995 Income statement Bad debt charge $ 1,700 $ 2,900 $ 2,100 Net income 15,800 15,300 14,400 Balance sheet Accounts receivable $27,400 $23,200 $23,100 Allowance for bad debts (cr.) 2,100 3,000 2,300 Stockholders’ equity 78,500 75,000 71,400 On December 27, 1996, Ticheley sent merchandise with a sales price of $8,500 to a major cus¬ tomer. The merchandise was in transit as of December 31. The cost of the inventory shipped was $2,900, and the company chose to record the sale and outflow of inventory on January 4, 1997, when the customer received the shipment. Ticheley’s management is compensated par¬ tially on an annual bonus where all managers share equally in a $10,000 bonus pool if reported net income exceeds 20 percent of shareholders’ equity. REQUIRED:

a. Ticheley’s president recently stated in a letter to the shareholders that the company has reported profit increases consistently over the last three years. Comment on this statement.

b. Why would a company establish a management compensation system where a bonus is paid if reported income exceeds a certain percentage of stockholders’ equity?

c. Identify any reporting strategy that Ticheley may be using, and support your position with calculations.

d. Explain why Ticheley may be using the strategy you mentioned above, and support your position with calculations.