SOLUTION MANUAL FOR te te
Intermediate Accounting Volume 1 8E Thomas H. Beechy, Joan E.
t e t e t e t e t e t e t e t e t e
Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel
t e te te te te te te te te
All Chapters 1-11
te te t e t e [With Appendix]
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Chapter 1: The Framework for Financial Reporting
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Case 1-1 t e Mulla and Yang te te
1-2 Richard Wright te
1-3 Taylor Jay te
Suggested Time te
Technical 1-1
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1-2 Chapter overview, true-false..............................
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1-3 Acronyms……………………………………… 10
1-4 IFRS or ASPE………………………………….
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1-5 IFRS or ASPE………………………………….
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1-6 Disclosed basis of accounting………………… te 10 te te
1-7 GAAP and reporting currency...........................
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1-8 GAAP and reporting currency...........................
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1-9 Users and objectives…………………………..
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1-10 Required financial statements............................
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Assignment 1-1 te IASB standard-setting......................................
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1-2 International comparisons................................ te 10
1-3 Accounting choices.......................................... te te 10
1-4 Effect of accounting policies ..........................
te te te t e 15
1-5 Reporting alternatives......................................
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1-6 Non-IFRS situations ........................................
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1-7 Reporting situations .........................................
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1-8 Reporting situations .........................................
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1-9 Objectives of financial reporting .....................
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1-10 Impact of differing objectives .........................
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1-11 Accounting policy disagreement...................... te te 15
1-12 Accounting policies and reporting objectives.. te te te te 10
1-13 Policy choice....................................................
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,Cases
Case 1-1 (LO1.2, LO1.3, LO1.4, LO1.5)
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Notes for Discussion With Elicia: te te te te
There is a conflict of interest between the objectives of Elicia and Dabika due to the
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buyout clause in the shareholder agreement. Elicia will have a motivation to decrease
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shareholders‘ equity since this will reduce the amount that she will be required to pay to
te te te te te te te te te te te te te te te te
buy out Dabika. Dabika will be interested in increasing shareholders‘ equity to increase
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the amount she will receive. It must be clarified who I am working for since I may have a
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conflict of interest since I know both parties.
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It is important that all accounting policies are ‗fair‘ to both sides. What is considered
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‗fair‘? From Dabika‘s perspective, fair could be accounting policies consistent with prior
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years. From Elicia‘s perspective, fair could be if the economic events change the
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accounting policy would change. Fair could be both sides split the difference where
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Dabika and Elicia disagree on value. In the future it is important that the shareholders
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agreement is more specific.
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Due to the choices allowed within GAAP a policy could be selected that would be more
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beneficial to one of the parties. It is assumed since this is a small private company that
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they are using ASPE. There is no indication that neither Elicia or Dabika would be using
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IFRS nor that the bank requires it.
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Inventory
Elicia wants to write off the inventory value for the garden gnomes and statues and this
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will decrease the amount of the payment to Dabika. According to ASPE, inventory would
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be valued at the lower of cost and net realizable value. Even though this inventory has
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been sitting in the gardening centre there is still a few being sold each year. This indicates
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there is still some value associated with the inventory and therefore it should not be
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written down to zero. It should be determined what the net realizable value of this
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inventory is to determine the amount of the write off. If it is all written off and then sold
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at a later date this would not be fair to Dabika since Elicia would get the benefit of a
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reduced shareholders‘ equity and thus a lower payment required to Dabika. The purchase
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of this inventory would have been a decision made by both Dabika and Elicia so if the
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inventory is unsellable they should both bear the impact of this decision.
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Warranty
According to ASPE the accounting policy is appropriate and a warranty expense should
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be included for the guarantee. The impact is that this would decrease shareholders‘ equity
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and the amount of the payment to Dabika. This is a new policy that did not exist until this
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year. The estimate of 5% was only based on sales from the fall. Since it is a new policy
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that was made by Elicia on her own it may be appropriate that the impact of this is
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excluded from the calculation of shareholders‘ equity. At a minimum the estimate
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should
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,be reviewed to determine if it is reasonable. Furthermore, the estimate, if included in the
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shareholders‘ equity calculation, should be agreed upon by both Elicia and Dabika.
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Computer Equipment te
ASPE is flexible in the method used to depreciate assets. The declining balance method
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using 40% would write off the value of the computers in approximately two years. This is
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very fast especially for a small company that is likely to use a computer for a longer
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period of time due to limited resources as compared to a larger company. Just because the
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computer may become obsolete quickly does not mean the business will not continue to
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derive benefit from the continued use of the computer. The impact of higher depreciation
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is a reduction in the payment to Dabika. If we look at consistency with other assets it
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would be appropriate to use the straight line method. We should inquire with Elicia as to
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her rationale for choosing declining balance instead of the straight-line depreciatoin
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method used for all other assets and determine the declining method reflects the actual
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usage of the asset (i.e. more of the asset used earlier on). Since again since this was a
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decision made only be Elicia maybe it should be excluded from the calculation or maybe
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the policy should be consistent with their other assets but further information is required.
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Case 1-2 (LO1.2, LO1.3, LO1.4, LO1.5)
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Dear Richard Wright: te te
I am happy to respond to your questions regarding the accounting changes that the new
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banker has requested. It is important that you realize that the needs of the banker are
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different than your needs. The bank is interested in your ability to make loan payments;
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therefore, the banker wants to assess future cash flows, collateral and your ability to pay
te te te te te te te te te te te te te te te
back the loan.
te te te
First, there is the issue of moving to the accrual basis. While it‘s true that, ultimately,
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what you earn is the net cash in your pocket, the cash basis of accounting doesn‘t wholly
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capture all of the cash flows that will happen in the future. Your banker wants to know
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what liabilities you‘ll have to pay in the coming months (and years), and what amounts
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you currently are owed that will be collected in the future weeks or months. The accrual
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method really gives a clear picture of future ―cash flow‖.
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It‘s for much the same reason that he wishes you to show your cattle at market value. I‘m
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sure he recognizes that both your dairy cattle and your breeders are intended for
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continued use and are not for sale in the normal course of business.As saleable stock, the
t e te te te te te te te te te te te te te te te
cattle represent a potential cash resource in the event of bankruptcy or default. After all,
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you probably use the cattle as collateral for loans, and he needs to know the value of that
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collateral.
te
You should not try to estimate the value of your stock by yourself. For credibility, you
te te te te te te te te te te te te te te te
should obtain an independent estimate. The valuation will require a professional
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evaluation (and the cost thereof), but will be necessary in order to satisfy the bank.
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te te te te te te
te te te te te te te te
, Sincerely,
Andriana
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Case 1-3 (LO1.1, LO1.2, LO1.3, LO1.4, LO1.5)
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Overview
This case is intended to get students to focus on the differences between companies and
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the various factors that have a bearing on their financial reporting objectives. Students are
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asked to prioritize the factors or characteristics that are most likely to affect each
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company‘s financial reporting.
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Company Characterics te
All three companies are private enterprises. Significant characteristics of each are as
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follows:
te
Breeze Inc. te Saturn Software te Intern’l Auto Parts te te
Business New mobile phone network
te te te Custom software te Auto parts for international
te te te
development auto makers
te
Owners Private investors and venture te te te Two entrepreneurs, not
te te Wealthy family te
capitalists wealthy
Other capital Egyptian fund
t e te Pension fund—pref. shares te te Debt through investment
te te
sources
te Bank line of credit
te te te te funds and by U.S. and Cdn.
te te te te te te
banks
Capital Capital intensive start-upte te Salary-based operation; te Established manufacturer; te
requirements
te working capital needed
te te te expanding to gain foreign
te te te te
customers
Constraints Egypt fund has 3 board seats
te te te te te Bank covenants: te Probable debt covenants te te
– restrictions on te
dividend/salary
te
payouts
te
– new debt te
Preferred dividend required te te
Reporting CRTC Pension fund te Investment funds and banks te te te
requirements Egypt fund; Japan partner
te te te Bank Potential new customers te te
IPO Not in the foreseeable future
te te te te Unlikely Yes, anticipated in 2-3 years
te te te te
probable?
te te te te te
te te te te te te te te
Intermediate Accounting Volume 1 8E Thomas H. Beechy, Joan E.
t e t e t e t e t e t e t e t e t e
Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel
t e te te te te te te te te
All Chapters 1-11
te te t e t e [With Appendix]
te
Chapter 1: The Framework for Financial Reporting
te te te te te te
Case 1-1 t e Mulla and Yang te te
1-2 Richard Wright te
1-3 Taylor Jay te
Suggested Time te
Technical 1-1
te Chapter overview, true-false..............................
te 10 te te
1-2 Chapter overview, true-false..............................
te 10 te te
1-3 Acronyms……………………………………… 10
1-4 IFRS or ASPE………………………………….
te te 10
1-5 IFRS or ASPE………………………………….
te te 10
1-6 Disclosed basis of accounting………………… te 10 te te
1-7 GAAP and reporting currency...........................
te te 10 te te
1-8 GAAP and reporting currency...........................
te te 10 te te
1-9 Users and objectives…………………………..
te te 10
1-10 Required financial statements............................
te 10 te te
Assignment 1-1 te IASB standard-setting......................................
te 10
1-2 International comparisons................................ te 10
1-3 Accounting choices.......................................... te te 10
1-4 Effect of accounting policies ..........................
te te te t e 15
1-5 Reporting alternatives......................................
te te 10
1-6 Non-IFRS situations ........................................
te te 15
1-7 Reporting situations .........................................
te te 20
1-8 Reporting situations .........................................
te te 15
1-9 Objectives of financial reporting .....................
te te te te 20
1-10 Impact of differing objectives .........................
te te te te 20
1-11 Accounting policy disagreement...................... te te 15
1-12 Accounting policies and reporting objectives.. te te te te 10
1-13 Policy choice....................................................
te te 20
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te te te te te te te te
,Cases
Case 1-1 (LO1.2, LO1.3, LO1.4, LO1.5)
te te te te te
Notes for Discussion With Elicia: te te te te
There is a conflict of interest between the objectives of Elicia and Dabika due to the
te te te te te te te te te te te te te te te
buyout clause in the shareholder agreement. Elicia will have a motivation to decrease
te te te te te te te te te te te te te
shareholders‘ equity since this will reduce the amount that she will be required to pay to
te te te te te te te te te te te te te te te te
buy out Dabika. Dabika will be interested in increasing shareholders‘ equity to increase
te te te te te te te te te te te te te
the amount she will receive. It must be clarified who I am working for since I may have a
te te te te te te te te te te te te te te te te te te te
conflict of interest since I know both parties.
te te te te te te te te
It is important that all accounting policies are ‗fair‘ to both sides. What is considered
t e t e t e t e t e t e t e t e t e t e t e t e t e t e
‗fair‘? From Dabika‘s perspective, fair could be accounting policies consistent with prior
te te te te te te te te te te te
years. From Elicia‘s perspective, fair could be if the economic events change the
te te te te te te te te te te te te te
accounting policy would change. Fair could be both sides split the difference where
te te te te te te te te te te te te te
Dabika and Elicia disagree on value. In the future it is important that the shareholders
te te te te te te te te te te te te te te te
agreement is more specific.
te te te te
Due to the choices allowed within GAAP a policy could be selected that would be more
te te te te te te te te te te te te te te te
beneficial to one of the parties. It is assumed since this is a small private company that
te te te te te te te te te te te te te te te te te
they are using ASPE. There is no indication that neither Elicia or Dabika would be using
te te te te te te te te te te te te te te te te
IFRS nor that the bank requires it.
te te te te te te te
Inventory
Elicia wants to write off the inventory value for the garden gnomes and statues and this
te te te te te te te te te te te te te te te
will decrease the amount of the payment to Dabika. According to ASPE, inventory would
te te te te te te te te te te te te te te
be valued at the lower of cost and net realizable value. Even though this inventory has
te te te te te te te te te te te te te te te te
been sitting in the gardening centre there is still a few being sold each year. This indicates
te te te te te te te te te te te te te te te te te
there is still some value associated with the inventory and therefore it should not be
te te te te te te te te te te te te te te te
written down to zero. It should be determined what the net realizable value of this
te te te te te te te te te te te te te te te
inventory is to determine the amount of the write off. If it is all written off and then sold
te te te te te te te te te te te te te te te te te te te
at a later date this would not be fair to Dabika since Elicia would get the benefit of a
te te te te te te te te te te te te te te te te te te te
reduced shareholders‘ equity and thus a lower payment required to Dabika. The purchase
te te te te te te te te te te te te te
of this inventory would have been a decision made by both Dabika and Elicia so if the
te te te te te te te te te te te te te te te te te
inventory is unsellable they should both bear the impact of this decision.
te te te te te te te te te te te te
Warranty
According to ASPE the accounting policy is appropriate and a warranty expense should
te te te te te te te te te te te te
be included for the guarantee. The impact is that this would decrease shareholders‘ equity
te te te te te te te te te te te te te te
and the amount of the payment to Dabika. This is a new policy that did not exist until this
te te te te te te te te te te te te te te te te te te te
year. The estimate of 5% was only based on sales from the fall. Since it is a new policy
te te te te te te te te te te te te te te te te te te te
that was made by Elicia on her own it may be appropriate that the impact of this is
te te te te te te te te te te te te te te te te te te
excluded from the calculation of shareholders‘ equity. At a minimum the estimate
te te te te te te te te te te te te
should
te
te te te te te
te te te te te te te te
,be reviewed to determine if it is reasonable. Furthermore, the estimate, if included in the
te te te te te te te te te te te te te te
shareholders‘ equity calculation, should be agreed upon by both Elicia and Dabika.
te te te te te te te te te te te te
Computer Equipment te
ASPE is flexible in the method used to depreciate assets. The declining balance method
te te te te te te te te te te te te te
using 40% would write off the value of the computers in approximately two years. This is
te te te te te te te te te te te te te te te te
very fast especially for a small company that is likely to use a computer for a longer
te te te te te te te te te te te te te te te te te
period of time due to limited resources as compared to a larger company. Just because the
te te te te te te te te te te te te te te te te
computer may become obsolete quickly does not mean the business will not continue to
te te te te te te te te te te te te te te
derive benefit from the continued use of the computer. The impact of higher depreciation
te te te te te te te te te te te te te te
is a reduction in the payment to Dabika. If we look at consistency with other assets it
te te te te te te te te te te te te te te te te te
would be appropriate to use the straight line method. We should inquire with Elicia as to
te te te te te te te te te te te te te te te te
her rationale for choosing declining balance instead of the straight-line depreciatoin
te te te te te te te te te te te
method used for all other assets and determine the declining method reflects the actual
te te te te te te te te te te te te te te
usage of the asset (i.e. more of the asset used earlier on). Since again since this was a
te te te te te te te te te te te te te te te te te te
decision made only be Elicia maybe it should be excluded from the calculation or maybe
te te te te te te te te te te te te te te te
the policy should be consistent with their other assets but further information is required.
te te te te te te te te te te te te te te
Case 1-2 (LO1.2, LO1.3, LO1.4, LO1.5)
te te te te te
Dear Richard Wright: te te
I am happy to respond to your questions regarding the accounting changes that the new
te te te te te te te te te te te te te te
banker has requested. It is important that you realize that the needs of the banker are
te te te te te te te te te te te te te te te te
different than your needs. The bank is interested in your ability to make loan payments;
te te te te te te te te te te te te te te te
therefore, the banker wants to assess future cash flows, collateral and your ability to pay
te te te te te te te te te te te te te te te
back the loan.
te te te
First, there is the issue of moving to the accrual basis. While it‘s true that, ultimately,
te te te te te te te te te te te te te te te
what you earn is the net cash in your pocket, the cash basis of accounting doesn‘t wholly
te te te te te te te te te te te te te te te te te
capture all of the cash flows that will happen in the future. Your banker wants to know
te te te te te te te te te te te te te te te te te
what liabilities you‘ll have to pay in the coming months (and years), and what amounts
te te te te te te te te te te te te te te te
you currently are owed that will be collected in the future weeks or months. The accrual
te te te te te te te te te te te te te te te te
method really gives a clear picture of future ―cash flow‖.
te te te te te te te te te te
It‘s for much the same reason that he wishes you to show your cattle at market value. I‘m
te te te te te te te te te te te te te te te te te
sure he recognizes that both your dairy cattle and your breeders are intended for
te te te te te te te te te te te te te te
continued use and are not for sale in the normal course of business.As saleable stock, the
t e te te te te te te te te te te te te te te te
cattle represent a potential cash resource in the event of bankruptcy or default. After all,
te te te te te te te te te te te te te te te
you probably use the cattle as collateral for loans, and he needs to know the value of that
te te te te te te te te te te te te te te te te te te
collateral.
te
You should not try to estimate the value of your stock by yourself. For credibility, you
te te te te te te te te te te te te te te te
should obtain an independent estimate. The valuation will require a professional
te te te te te te te te te te te
evaluation (and the cost thereof), but will be necessary in order to satisfy the bank.
te te te te te te te te te te te te te te te
te te te te te te
te te te te te te te te
, Sincerely,
Andriana
te
Case 1-3 (LO1.1, LO1.2, LO1.3, LO1.4, LO1.5)
te te te te te te
Overview
This case is intended to get students to focus on the differences between companies and
te te te te te te te te te te te te te te
the various factors that have a bearing on their financial reporting objectives. Students are
te te te te te te te te te te te te te te
asked to prioritize the factors or characteristics that are most likely to affect each
te te t e te te te te te te te te te te te
company‘s financial reporting.
te te te
Company Characterics te
All three companies are private enterprises. Significant characteristics of each are as
te te te te te te te te te te te
follows:
te
Breeze Inc. te Saturn Software te Intern’l Auto Parts te te
Business New mobile phone network
te te te Custom software te Auto parts for international
te te te
development auto makers
te
Owners Private investors and venture te te te Two entrepreneurs, not
te te Wealthy family te
capitalists wealthy
Other capital Egyptian fund
t e te Pension fund—pref. shares te te Debt through investment
te te
sources
te Bank line of credit
te te te te funds and by U.S. and Cdn.
te te te te te te
banks
Capital Capital intensive start-upte te Salary-based operation; te Established manufacturer; te
requirements
te working capital needed
te te te expanding to gain foreign
te te te te
customers
Constraints Egypt fund has 3 board seats
te te te te te Bank covenants: te Probable debt covenants te te
– restrictions on te
dividend/salary
te
payouts
te
– new debt te
Preferred dividend required te te
Reporting CRTC Pension fund te Investment funds and banks te te te
requirements Egypt fund; Japan partner
te te te Bank Potential new customers te te
IPO Not in the foreseeable future
te te te te Unlikely Yes, anticipated in 2-3 years
te te te te
probable?
te te te te te
te te te te te te te te
