YourTel Networks (YTN) is a leader in the communications equipment industry for both commercial and residential needs. Its shares trade on the Canadian TSX and the U.S. NYSE stock exchanges. The company had been experiencing unprecedented growth in company size and stock price, but then, in the 2^nd quarter of 2011, its revenues and profits declined dramatically and were well below analysts forecasts. However, its stock price did not decline too much because these were only quarterly financial results.

To improve future results, YTN decided to add a new telephone system called Magellan NorthStar. This system would be produced immediately at their current operating plant in Calgary because it is not at capacity. To finance the expansion, the company will issue new shares. This will not be a problem because their stock is still considered a buy by investors.

As a consequence of the recent decline in revenues and profits, the Board of Directors wants to ensure the companys earnings per share (calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding) is above analysts expectations for fiscal year-ending December 31, 2011.

Today is January 31, 2011 and you have just been hired as a new financial accounting manager. This is your first week on the job and the financial accounting analyst has provided you with the draft 2011 financial statements for your review. You notice, during your review, that a number of items need to be re-examined and you have decided to write a report to the Chief Financial Officer (CFO), the person that hired you. The CFO is also on the board of directors. You will submit this report within 7 days well before the board meeting scheduled for late February. This is not your first time submitting a report of this nature and you want to impress the CFO.

1. YTN is confident that sales of the new Magellan NorthStar system during the last half of the year will bring it back to its regular level of profitability. Customers order these telephone systems, that can be as high as 1000 for a single commercial customer. The customer will be invoiced as the order is completed and the telephone systems are put into a separate section of the Calgary warehouse and tagged with the customer name. But the phones will not be delivered until requested by the customer. YTNs bad debts expense has traditionally been less than 1%. During the last half of the month of December, YTN produced $100 million dollars of these phone systems and invoiced customers from previous experience of who has bought phone systems. The amount was booked to revenues.

2. In order to increase cash flow YTN, on December 10, 2011, transferred $1,200,000 of accounts receivable to Risk Financing Co. with no-recourse, notification basis, that effectively transferred legal control to Risk Financing Co. Risk is permitted to resell the accounts receivable without permission from YTN. Risk charges 5% commission on the Gross accounts receivable transferred for taking on the transfer. Although cash has been received from Risk, no entries have been done by YTN for the year ending December 31, 2011.

3. During January of 2011, YTN had started preparing its Statement of Cash flows (SCF). Of particular interest to you was the cash Dividends paid was placed in the financing section for the first time. The amount was large and represented 10% of the revenue for the year. Another item that would likely need explaining is that tax expense was now included as a separate line in the operating section using the indirect approach. In past years, tax expense was already deducted from net earnings and therefore, not included as a separate line. Your review of the remaining items of the SCF is not materially different from previous years or unusual.

Required: (Total 30 marks)

Provide a report to the Chief Financial Officer. Ensure that you discuss and recommend to the CFO how each event should be accounted for. Be sure to also discuss financial statement implications and, if applicable, any numerical effects and potential journal entries, etc. (23 marks)

[3 marks for Grammar and Format]