To: Mr. Lee and Ms. Marissa
Roles and Responsibilities as Analysers/Advisors
As requested by the owners of Healthy Dairy Incorporated, this report was created to report on the analysis made on HDI’s accounting methods, as well as provide recommendations on which policies the company should adopt.
Users Affected by the Transactions and their Objectives
Currently, an user of the financial statement is the bank as HDI has already obtained loans from it and might require more loans in order to expand and keep up with the demand of their products. The bank’s objective would be to acquire accurate and reliable financial statements in order to evaluate the company’s performance and management. The bank would also want to ensure that the company is in compliance with the maximum debt-to-equity ratio. Additionally, the bank would want to make cash flow predictions to ensure that the company will be able to pay the interest on the loan that is borrowed. Secondly, the owners are the users because they would want to evaluate the performance of their company. They would also want to monitor the compliance of maximum debt-to-equity ratio. Due to the maximum debt-to-equity ratio, minimum liability and maximum equity is also an objective of the owners. As they plan to go public soon, their objective would be to attract shareholders by maximizing their net income. Thirdly, The Canada Revenue Agency, would want to confirm that HDI is paying the right amount of tax and adhering to Canadian and provincial/territorial tax laws. The ministry of Agriculture is another main user of the financial statements. They want to make sure that the company will meet the conditions of providing audited financial statement, otherwise, they would need the grant to be repaid. Of these users, the main user is the bank and the main objective would be to maximize the HDI’s net income and be in compliance with the lowest possible debt-to-equity ratio.
Since HDI is planning to go public soon, they should adhere to the IFRS standards while creating their financial statements. Also, since the company might attain a loan from the bank in order to finance their expansion to keep up with the demand, it is recommended that the company adheres to IFRS guidelines and expectations as the company will have to submit audited financial statements to the bank annually. Therefore, in this report, IFRS guidelines will be used for the recommendations. The other constraint is the maximum debt-to-equity ratio. The ratio has to be maintained in order for the company to sustain the loan from the bank.
Issues with Objectives with Recommendations
The loan that is provided by the Ministry of Agriculture, can be accounted as a capital asset. This is because if HDI is certified organic, it won’t have to repay the loan. The fact that HDI has invested in the computers as well as a tailored program to keep records of the cow feed indicates that it is likely the conditions will be met and HDI will not need to repay the loan. On the other hand, the alternative is to record the loan as a liability. This is because there is not sufficient assurance that in the future the government will grant HDI the loan. It is recommended that the loan received should be accounted for as a capital asset. Due to HDI’s huge investment in the computers and the software that will track what cows eat, it is likely that they will meet the conditions and will not need to repay the loan. HDI should amortize this capital asset over its life time with straight-line depreciation. This recommendation will increase the equity instead of the liability which complies with the objective of maintaining a low debt-to-equity ratio. Nevertheless, HDI should disclose this in the notes of its financial statements.
Asset Recognition Issue: Capital Asset/Inventory
There are three types of cows; the milking cows, the breeding cows and the