Case_Assignment_1_-_CP_3-5_Solution_Revised

Case_Assignment_1_-_CP_3-5_Solution_Revised - UTSC 2011...

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Unformatted text preview: UTSC 2011 Fall Case Assignment 1 CP 3-5 - Notes MGTB05 Case Assignment #1 Suggested Solution Page 1 1. Role: You are playing the role of a loan officer of from UTS Bank. Tom Martinez has come to you to seek for a $100,000 loan to build a dry dock to store boats for customers in the winter months. You indicated to Tom that you would review the financial statement and other relevant information provided and get back to him with a report regarding your decision for the loan in a couple of weeks. 2. Users and Objectives: a. Tom Martinez Ensure continued success and growth for his boat repair service company; wants to provide enough and valid information to you as a loan officer at UTSC Bank and obtain your approval for a $ 100,000 loan to build a dry dock to store boats for customers in the winter months. He is bias to maximize income and assets to increase his ability to acquire the loan. b. UTSC Bank want information to assess the companys ability to pay the bank loan of $ 100,000 and also wants sound and valid financial reporting to assess the strength of the financial position of Toms company. Wants financial statement to be in accordance with an appropriate standard to allow them to compare company results with other companies within the same industries to establish consistency and comparability in their performance. c. Discuss the conflict and make an appropriate recommendation 3. Constraints: a. Being a privately owned company, Toms company has the option to adopt either IFRS or ASPE. Students should make a recommendation of either one of these standards and justify the reasoning for the choice. It is reasonable to assume ASPE as the choice of accounting standard given the size of the company and the cost of IFRS implementation. b. Bank Covenant UTSC Bank may impose certain measurement/covenant and benchmark to assess the viability and strength of Toms company to pay back the proposed bank loan of $100,000. It is not clearly stated in the case, but students can make a reasonable assumption that the bank would use ratios as a way to evaluate the companys performance. 4. Issues/Analysis/Recommendation: a. Cash versus Accrual basis of accounting: The company is currently using cash basis accounting to record their revenue and expenses. Under IFRS/ASPE, cash basis accounting is not acceptable. It is a requirement that Toms company should adopt the accrual basis of accounting. This means that revenue is recorded when earned and expenses when incurred regardless of payment. b. Business entity concept: The financial position presented has both individual and company assets and it will be difficult for the bank to distinguish between the two. The financial statement for the repair shop should be kept separately from the personal assets of Tom Martinez. UTSC 2011 Fall Case Assignment 1 CP 3-5 - Notes MGTB05 Case Assignment #1 Suggested Solution Page 2 c. Restatement of current financial statement presented:...
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This note was uploaded on 12/29/2011 for the course MANAGEMENT MGTB05 taught by Professor Georgequanfun during the Fall '11 term at University of Toronto- Toronto.

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Case_Assignment_1_-_CP_3-5_Solution_Revised - UTSC 2011...

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