QUESTION #$1(12$ Marks $|30$ Minutes$)$

You are a Senior Accountant working for a sole practitioner in Beiseker, Alberta. You receive a call from Stephen Randolph, a farmer who operates a large dairy farm in Central Alberta.

"Sorry to call you on short notice, but I've just finished a meeting with my banker. You'll recall that I need to renew my loans every year. The new Bank Manager has requested that I make some changes to my financial statements this year before the bank will process my loan renewal."

"The new Bank Manager wants me to switch from the cash basis of accounting to the accrual basis of accounting. I don't quite understand the difference. The cash basis provided me with the information I need to evaluate the business, make decisions and determine our performance for the year. After all, what I earn in a given fiscal year is determined based on any remaining cash flows. I know that the Canada Revenue Agency will accept either the cash or the accrual basis of accounting from farmers, so I don't understand why I need to change anything."

"Also, the Bank Manager is asking me to determine the market value of my cattle. I don't understand why the bank would need this information."

"I know I have to give the Bank Manager the information they've requested, but I would really appreciate your help to better understand why the bank is requesting these changes."

REQUIRED:

Prepare a memo to Stephen covering the following:

Explain the difference between the cash basis and accrual basis of accounting.

Explain why the bank is requesting financial statements prepared using the accrual basis.

Why would be bank be interested in the market value of Stephen's cattle?

If you were the Bank Manager, what sort of additional information would you request from Stephen to make a decision on whether or not to renew the loan?

Your response should contain $3-5$ paragraphs $(3-5$ sentences or bullet points per paragraph$).$