Case_-_Chapter_3_-_CP3-6 - CP36 Case Analysis Determine...

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CP3–6 Case Analysis Determine your role and analyze the real required You are an accountant with a good understanding of accounting policies and financial statement reporting. Your role is to provide an unbiased assessment of the fairness and reasonableness of Paula’s accounting policies, and to provide Gianni with advice to ensure that the bakery’s profit will be measured fairly and reasonably in future years. Identify the users and their information needs. If the case environment does not provide a clear indication, you must make a reasonable assumption and integrate this assumption in your case analysis. Gianni is the former owner of La Forêt Inc. bakery. Gianni needs to determine if the bakery’s profit for the first year is understated, as his share of profit is calculated based on 25% of the bakery’s reported profit. The purchase agreement states that Gianni is entitled to 25% of the bakery’s profit in each of the next five years, therefore Gianni also needs to ensure that profit is measured fairly and reasonably in future years. Paula is the new and current owner of La Forêt Inc. bakery. Higher profit reported by the bakery would result in a higher share of profit paid to Gianni; a higher share of profit paid to Gianni would result in less cash available to the bakery to cover expenses (including Paula’s salary) and to re-invest in the business. Therefore, Paula’s application of accounting policies may be biased toward reporting lower profit. It is recommended that Gianni’s user needs are the most important needs to address, because Paula has calculated the bakery’s profit, and Gianni’s share of profit will be calculated based on the bakery’s reported profit. Identify the constraints and opportunities According to the purchase agreement, the bakery’s profit should be measured in a fair and reasonable manner, therefore La Forêt Inc.’s financial statements should be prepared in accordance with an applicable financial reporting standard such as GAAP-IFRS or Accounting Standards for Private Enterprises (ASPE). Gianni may choose to hire an auditor to audit the bakery’s financial statements to ensure that profit is fairly and reasonably stated in accordance with the applicable standard. Gianni and Paula may also consider hiring an arbitrator to resolve any differences. Determine, list and rank issues
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Case_-_Chapter_3_-_CP3-6 - CP36 Case Analysis Determine...

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