Case Study

"Sports World Incorporated"

Introduction

Sports World Incorporated $($SWI$)$ is a wholesaler of sporting clothing and equipment specializing in skiing, hockey, figure skating, and mountain climbing with operating locations in British Columbia and Alberta. SWI hired a new accountant who prepared financial statements to be presented to the auditors. As a publicly$-$traded company, SWI follows IFRS.

SWI has adopted the following accounting policies.

Basis of Accounting $-$ Accrual basis where revenues are recorded when earned and expenses are recorded as incurred regardless of the timing of cash flows.

Accounts Receivable $-$ Allowance method using the $\%$ credit sales method. At year$-$end, a detailed analysis of receivable balances occurs to write$-$off receivables known to be uncollectible and ensure the remaining receivables are properly valued at "net realizable value".

Inventory $-$ Inventory is accounted for using the perpetual inventory system with a FIFO cost flow assumption. Inventory is valued at the lower of cost and net realizable value. Impairment is assessed on an annual basis.

Investments $-$ Investments in shares with $"$no significant influence" are accounted for under the FV$-$OCI method. Investments in bonds are accounted for under the amortized cost model.

Long$-$Term Assets $-$ All long$-$term assets are accounted for under the cost model and are being depreciated using the straight$-$line method $($with exception to land and goodwill$).$ Impairment testing occurs on an annual basis using the Rational Entity Impairment Model.

Revenue Recognition $-$ Revenue is recognized when legal title to inventory transfers between buyer and seller. The company sells to customers on $2/10,$ net $30$ day basis. Customers can return products for refund or customer credit within $30$ days of the date of purchase.

Upon incorporation, SWI was authorized to issue an unlimited number of common shares and $50,000$ $$2\mathrm{.}00$ non$-$cumulative preferred shares. At December $31,2022$ the company had $250,000$ common shares and $10,000$ preferred shares issued and outstanding. The total "paid in capital" from common shares and preferred shares was $$500,000$ and $$100,000,$ respectively. SWI declared and paid cash dividends of $$90,000$ during the year. No shares were issued or retired during $2022.$

SWI has an operating bank account held at TD Bank as well as a payroll account at Royal Bank of Canada. SWI has dealt with TD Bank since incorporation, but the payroll service agency who processes SWI's monthly payroll insisted on SWI opening an account at Royal Bank since this is their "preferred" financial institution. As a result, SWI makes monthly bank transfers between the operating account and the payroll account to ensure all employees get paid. Both bank accounts have overdraft protection.

Case Requirements

You are an auditor with Mandryk & Associates LLP$.$ The main accountant employed by SWI was recently hospitalized due to COVID$-19$ and as such, could not prepare the financial statements for the year$-$ended, December $31,2022.$ Instead, a junior accountant was approached to draft the financial statements which have been given to you for your review $($Appendix A$).$

Give a written report that addresses the following questions using the headings in bold below. The responses under each of the headings should be written in paragraph form and provide clear answers & recommendations.

Note to Students: Your responses will be evaluated for "depth in discussion". Please state facts and opinions that are substantiated with critical thought and reasoning. Where possible, use case facts in your answer. Remember, part of the skills you will need in your career are the ability to evaluate alternatives, make recommendations, and communicate your findings in a professional way. Be clear and concise $-$ quality of answers will be more important than quantity of words that lack depth in discussion.

Case Questions

The Conceptual Framework

Accounting standards are built around the "conceptual framework". Briefly explain the purpose of the conceptual framework and the role it plays in providing information that is useful for decision making. $[4$ marks$]$

Examine the draft financial statements. In general, what aspects of the conceptual framework have been violated? What recommendations would you make for improvement? $[6$ marks$]$

Correcting the Financial Statements

Prepare a corrected classified statement of financial position $($balance sheet$).[25$ marks$]$

Prepare a corrected multi$-$step income statement. $[30$ marks$]$

Hint: When preparing corrected financial statements, ensure all proper terminology is b