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.

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

Additional information provided:

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. 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. 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. 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. 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 StoreCapital. 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.