Papadopoulos Limited (PL) sells retail merchandise in Canada. The company was incorporated last year and is now in its second year of operations. PL is owned and operated by the Papadopoulos family, and Iris Papadopoulos, the company president, has decided to expand into the American marketplace. In order to do this, bank financing will be necessary.
The books have been kept by Iris’s daughter Tonya, who is studying accounting in university. Financial statements had only been prepared for tax purposes in the past. For the year ended December 31, 2011, Tonya prepared the following statement showing cash inflows and cash outflows:
Sources of cash:
From shareholder loan ................... $150,000
From sales of merchandise .................. 350,000
From truck financing .................... 50,000
From term deposit cashed in ................. 100,000
From interest income ................... 10,000
Total sources of cash ................... $660,000
Uses of cash:
For fixed asset purchases ................. $100,000
For inventory purchases .................. 250,000
Operating expenses, including depreciation of $70,000 ..... 160,000
For purchase of investment ................ 55,000
For purchase of truck ................... 50,000
For interest on debt .................... 30,000
Total uses of cash .................... $645,000
Net increase in cash ................... $15,000
Tonya showed the statement to her mother, noting that the bank was sure to give them a loan, especially since they were profitable in their second year and since cash had increased over the year, which shows that it had been a good year.
Iris was not convinced, however, and decided to have the statement looked at by a “real” accountant.
Instructions
Adopt the role of the accountant and redraft the statement, if necessary, in good form for the bank. Discuss the company’s financial position. Consider PE GAAP to be a constraint.