Mike Evergreen wants to expand the operations of Simcoe Lawns. In order to do so he needs additional funding and has approached the bank in this regard. You are a CPA and your task is to report back to your firm's partner with:

1. Adjusted financial statements: o Income Statement

o Statement of Financial Position

o Statement of Cash Flows
2. EstablishmentofAccountingpolicies
3. Other factors that would be relevant when applying for a bank loan.

As this course is an accounting course the focus tends to be on Item 1 above which is more the technical aspect, i.e., the financials. It is certainly important to present to the bank accurate financial statements and in this regard there are several adjusting entries needed to correct the financial statements provided in this case. That said, bank's look at other factors beyond just the numbers and in your report you should address this. At the end of the day you want Mike Evergreen to have a compelling report on which the bank can makes its loan decision.

The approach I would take for the financials is to set up an excel spreadsheet with a tab for Income Statement, a tab for the Balance Sheet, and a tab for the Cash Flow Statement. To assist you, I have attached, to this Update, an excel file with a suggested format for the Income Statement for the Balance Sheet. I would use this file and add a tab for the Cash Flow statement.

There are several adjusting entries that need to be posted to the Income Statement and Balance Sheet to arrive at accurate statements. Exhibit 1 provided in the case lists a number of transactions. There are several instances where the transactions were not correctly recorded in the books. You need to determine the appropriate adjusting entries and then post the adjustments to the financial statements. I would list all adjusting entries on a separate Appendix. As an example, and to help you out, here is one of the adjusting entries that needs to be made.

One of the bullet points in Exhibit # 1 notes that Mike, on July 1, 2019, purchased equipment for $50,000. No depreciation was recorded in 2019. The adjusting entry required is as follows:

  

1

Purchase price: Residual value: Estimated life:.

$50,000 2,000

7 years
2019 depreciation: [$50,000-$2,000] /7 years = $6,857/year

Adjusting Entry for 2019:

Dr. Depreciation expense $3,429 Cr. Accumulated depreciation

$3,429

To record 1⁄2 year ($6,857 X .5) of depreciation for the purchase of equipment on July 1, 2019

I posted this adjusting entry in the attached excel file.
You need to repeat this process for every adjusting entry required.

Once you have determined all of the adjusting entries and posted the adjustments to the Income Statement and/or Balance Sheet then you will arrive at adjusted Financial Statements for 2019.

From there you can do the Cash Flow Statement. You should be familiar with this statement from this course and your introductory accounting course. With an adjusted 2019 Income Statement and an adjusted Statement of Financial Position (Balance Sheet) as at December 31, 2019 and 2018 comparatives you have everything to work on this statement.

Finally, on the quantitative analysis you should construct financial ratios based on the

revised financial statements and comment on these ratios. You have been provided

some industry financial ratios and are in a position to provide comparative analysis,

including how SLL's ratios might be viewed by the bank as it looks to secure funding.

 

Qualitative Analysis

The case does not provide a lot of background information about the company, Mike Evergreen, or the industry. I am not looking for an extensive analysis in this area however, there are some areas that can be considered.

• What are the risks possibly facing SLL?
• Growth industry?
• Competitive industry?
• Experience (years in business)
• Ability to handle growth (is Mike a one-man shop)