Plastics Ontario (PO) has recently been incorporated under federal legislation. All the shares are owned by one man, Tom Slank. PO will be active in the molded plastics industry, making everything from custom lettered signs to consumer products (e.g., toys) and industrial products (e.g. car dashboards). They will also supply chemicals to other, smaller plastic molding operations.

Slank has 20 years experience in both production and sales with a large Canadian plastics firm. He took advantage of several recent bankruptcy sales to acquire the manufacturing and molding equipment necessary to start his own firm. He has obtained a 10-year, fixed interest loan from the Federal Business Development Bank, a line of credit from a chartered bank for working capital and has invested $400,000 of his own money. Both banks required audited financial statements.

The major pieces of equipment acquired cost $700,000. Another $60,000 will be spent transferring them to POs new leased facility. Slank estimates another $80,000 will be spent debugging the equipment.

Sales are expected to be made on three bases:

1. Custom signs on a prepaid basis. Signs would normally be completed within five business days but could take up to a month for a large order or if volume was high.

2. Direct sales to distributors and manufacturers on terms of 2/10, n/30. Interest on overdue accounts will be 1.4 percent per month. Customers can return defective goods for full credit, and, in common with the industry, goods carry a six-month warranty.

3. Customer goods to retail outlets on a consignment basis. Slank does not expect to be able to run his molding equipment at full capacity from outsider orders for at least two years. Therefore, he plans to design and market a few consumer products (e.g., doll houses) to keep his operation busy. Several large retail chains have expressed interest in carrying these items but only on a consignment basis. Slank estimates that it will cost him $40,000 to design and develop these items.

Slank hopes to break even in the second year of operation and show a profit in the third year. Losses are anticipated for the first year. He has planned to take an extremely low salary for the first three years until he is satisfied that the company can prove its viability. Slank has established relatively low salary levels for his management team but has promised them generous bonus based on net income. Slank has approached you, CPA, to act as financial advisor. He has requested advice on accounting policies and other relevant issues.

Task: Adopt the role of adviser to Mr. Slank and draft a report responding to his request.