Q2. ClothsforYou plc is a medium sized UK listed internet-only clothing retailer that has achieved annualised growth rates in excess of 25% over the last few years. The customer base is teenagers and young adults, who are targeted with social media advertising and celebrity endorsement campaigns. The company owns a number of distribution hubs throughout the UK and Europe and has also invested heavily in sophisticated websites, data analytics and robust computer hardware infrastructure. Although the company is a listed company, the majority of its shares are held by the founders of the business. The Chairman, who is one of the founders, acts in an executive capacity at the head of the Board of Directors, three of whom are non-executive and three (excluding the Chairman) who are executive. Two of the Chairman's adult sons are also employed in the business, one as Creative Director and the other as the Chief Operating Officer (COO). The company does not manufacture any of its clothes and instead has built a short supply chain using mainly UK based clothing manufacturers, most of whom are small family-owned businesses. There have been recent rumours about some of the suppliers to the company having poor employment practices. These allegedly include failing to pay the minimum wage to some employees, not providing the statutory comfort and lunch breaks and poor social distancing during the coronavirus crisis. ClothsforYou has come in for some criticism in recent months due to a perceived lack of effective governance in the business. In a recent development, the company announced a new bonus scheme for the Chairman and his sons plus the other founding director that would pay out in excess of 150 million in bonuses should the company achieve a set share price growth target. This proposed scheme has been heavily criticised by financial journalists and some of the company's larger institutional shareholders. At the start of the coronavirus crisis, revenue growth started to slow. In order to offset this, the company launched a sales campaign called 'Try Before You Buy', in which customers can order clothes and have up to 28 days in which to decide whether or not to buy them. Customers would not be required to pay for their clothes until the 28 days period had expired. This has proved very successful and has boosted revenue growth. Required: Evaluate the potential for ClothsforYou to manage its earnings and explain two areas of the financial statements where earnings management could take place..

1. Q2. ClothsforYou plc is a medium sized UK listed internet-only clothing retailer that has achieved
annualised growth rates in excess of 25% over the last few years. The customer base is teenagers
and young adults, who are targeted with social media advertising and celebrity endorsement
campaigns. The company owns a number of distribution hubs throughout the UK and Europe and
has also invested heavily in sophisticated websites, data analytics and robust computer hardware
infrastructure. Although the company is a listed company, the majority of its shares are held by the
founders of the business. The Chairman, who is one of the founders, acts in an executive capacity
at the head of the Board of Directors, three of whom are non-executive and three (excluding the
Chairman) who are executive. Two of the Chairman's adult sons are also employed in the
business, one as Creative Director and the other as the Chief Operating Officer (COO). The
company does not manufacture any of its clothes and instead has built a short supply chain using
mainly UK based clothing manufacturers, most of whom are small family-owned businesses.
There have been recent rumours about some of the suppliers to the company having poor
employment practices. These allegedly include failing to pay the minimum wage to some
employees, not providing the statutory comfort and lunch breaks and poor social distancing during
the coronavirus crisis. ClothsforYou has come in for some criticism in recent months due to a
perceived lack of effective governance in the business. In a recent development, the company
announced a new bonus scheme for the Chairman and his sons plus the other founding director
that would pay out in excess of 150 million in bonuses should the company achieve a set share
price growth target. This proposed scheme has been heavily criticised by financial journalists and
some of the company's larger institutional shareholders. At the start of the coronavirus crisis,
revenue growth started to slow. In order to offset this, the company launched a sales campaign
called 'Try Before You Buy', in which customers can order clothes and have up to 28 days in which
to decide whether or not to buy them. Customers would not be required to pay for their clothes
until the 28 days period had expired. This has proved very successful and has boosted revenue
growth. Required: Evaluate the potential for ClothsforYou to manage its earnings and explain two
areas of the financial statements where earnings management could take place.