The following financial statements were provided by Sumsong Electronics Company. The owner, Gillian Sumsong, is applying for a second loan from the bank to buy some new equipment. The bank manager has requested these financial statements before considering a new loan to the company. Gillian has asked you to look at the statements and provide feedback. The company uses a perpetual inventory system and the contract-based approach for revenue recognition. All sales are made with terms of n/30. Sumsong has a 60-day return policy.

Additional information provided:

1. The cash balance consists of $5,000 in the company chequing account and $495,000 in an investment that Sumsong Electronics made in the common shares of a new social networking company.

2. Property, plant, and equipment assets are being depreciated over 2 years even though they are expected to have a useful life of 10 years. Gillian considers depreciation a fund to purchase additional assets in the future and has the bookkeeper record it as an asset.

3. Merchandise inventory on hand has a realizable value of $25,000 and a cost of $29,000. Gillian does not adjust merchandise inventory on the balance sheet for any items sold.

4. The bank loan reported on the balance sheet represents a mortgage payable to the Bank of Toronto. The term of the mortgage is 15 years and payments of principal and interest are made monthly.

5. Gillian owns an appliance store in addition to the electronics store. The bookkeeper records some of the appliance store?s transactions in the electronics store and credits the equity account Sumsong Appliance Store?Capital.

6. All the company?s operating costs are paid by Gillian using her personal credit card so that she can accumulate travel points. The bookkeeper records all payments on the card as an expense to the company.

Instructions

Using the concepts in the conceptual framework covered in this chapter, answer the following questions:

a. Are these statements useful to the bank manager? What information will the bank manager be looking for when Sumsong Electronics applies for a loan?

b. Are the assets, liabilities, revenues, and expenses recognized in the financial statements appropriate? If an element is incorrectly recognized, explain why.

c. Has Sumsong followed the guidance for relevance and faithful representation? If not, what are the violations?

d. Are there any revenue recognition problems that you can see? Are there any measurement problems? If so, how would these problems be corrected?

e. Have the reporting entity and full disclosure concepts been followed? Explain.

Taking It Further

Gillian has approached you with a proposition to invest in her company. Based on the financial statements provided, assess Gillian?s stewardship of the company assuming she is the manager as well as the owner.

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SUMSONG ELECTRONICS COMPANY Balance Sheet September 30, 2021 Current assets Cash Accounts receivable $500,000 2,500 Merchandise inventory 135,000 $637,500 75,000 Total current assets Property, plant, and equipment Depreciation of property, plant, and equipment Total assets 75,000 $787,500 Liabilities $ 16,000 Accounts payable Bank loan owing 160,000 Total liabilities $176,000 Equity G. Sumsong, capital Sumsong Appliance Store, capital Total owner's equity 546,500 65,000 611,500 $787,500 SUMSONG ELECTRONICS COMPANY Income Statement For the Year Ended September 30, 2021 Sales $175,000 Sales-customer deposits Sales-orders to be filled 14,000 18,000 Total sales $207,000 Expenses G. Sumsong, personal credit card expense G. Sumsong, withdrawal expense Vehicle expense (purchased for deliveries) 45,000 24,000 60,000 Total expenses 129,000 Net income $ 78,000