This case requires students to evaluate financial reporting practices adopted by a small apparel company. The company’s owner/manager has recently taken the business in a new direction, and is asking for help in determining whether the company’s existing

Nicki is confident the part-time accountant has properly recorded warehouse repairs, shirt

purchases, and regular operating expenses, but she is unsure about the company’s methods

of accounting for custom shirt sales and possible returns of graphic shirts. She also is concerned that the accountant may have missed some estimates needed when accounting for inventory and accounts receivable.

Required

Prepare a memo to Nicki that addresses her uncertainties and concerns. For each area of concern, (1) describe the applicable accounting standards and the accounting method currently used, (2) evaluate the current method by considering case facts that support and refute the current method, (3) propose an alternative method or modification to the current method to improve GAC’s accounting, and (4) explain the likely effects of the alternative method or modification on GAC’s financial statements and how these effects could influence GAC’s compliance with terms of its lending agreement. When considering case facts in (2), evaluate both qualitative and quantitative information. For example, you should calculate and use the implications of changes in days to collect receivables and days to sell inventory to critically evaluate GAC’s existing accounting policies for valuing accounts receivable and inventory.

Support for your position and the clarity and professionalism of the memo.