The SFP of Karmax Ltd. discloses the following assets:

Note 1 The long- term investment is an investment in the common shares of a company owned and operated by the two sons of Karmax's major shareholder. The Karmax investment is 25% of the outstanding shares. The long- term investment is accounted for using the equity method. The sons’ company has never sold shares to a nonfamily investor, and the Karmax share-holder provided this estimate of value.

Note 2 Karmax holds patents on a successful consumer product, licensed to various manufacturers. Significant annual royalties are earned; the recorded SFP value consists of legal fees paid during patent infringement cases. The $ 10 million estimate of market value is based on discounted future cash flow.

Required:

Prepare a brief report that contains:

1. An analysis of the reliability of the various market value estimates as a good predictor of future cash flows; and

2. An assessment of the usefulness of the (primarily historical cost) SFP to:

a. A banker making a lending decision.

b. An investor evaluating return on investment.

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KARMAX LIMITED Statement of Financial Position (Extracts) Year ended 31 December 2OX6 in thousands of Canadian dollars) Assets Current assets Cash Short-term investments Accounts receivable Inventory Prepaid expenses $ 710 416 1.011 2,600 410 Total current assets Tangible capital assets, net Intangible capital assets, net Long-term investments Total assets 5,147 14,755 984 1.077 $21,963 The following information has been established in relation to market values (amounts in thousands of dollars) Market Value Source $416 $4.190 Short-term investments Inventory Tangible capital assets Long-term investment Intangible capital assets Quoted stock market price Karmax price list 000-$25,000 state appraisal $20, $3,000 $10,000 (Note 1) (Note 2)