Question

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 company’s earnings per share (calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding) is above analyst’s 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. YTN’s 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)

(1) Provide a case plan which identifies the major forces (e.g., users and their needs, constraints, management bias, etc.) that may affect YTN’s financial reporting objectives. Be sure to keep your plan case-specific.

Answer 1

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.

+VE EPS in Company

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

Point to be noted while reviewing Financial Analysis :

· 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.

· YTN’s 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

Cash Flow issue :

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.   

Statement of Cash flow :

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

Action plan with highlights :

Company having established business in Telephone system . Recently company decline in revenue and profit but in Investor segment company still having “ Buying “ rating . Company is quite confident that with another big order which will material secod part of teh year they will be bouce back .

Now in the second part of the year, Company recorded revenue booking of $ 100 Mio but here company recorded revenue booking / rather revenue recognised without customer acceptance . Company to boost up revenue as well as increase bottom line , they recognised revenue amount of $ 100 Mio without customer confirmation . They have under assumption and a per past trend , they send mobile those customer who accepted the same last time . This is NOT the correct way of recognised such high value of revenue . Company to meet their numbr in 2nd half of the year , they have accounted and recognised this revenue

Cash flow - Disclosure is fine as per Standard Guideline . Compay paid Divided and disclose under Financial activities . This is correct way to disclose plus as per IFRS , company can disclose dividend and Interest in any head of cash flow but thet should be maintain on consistent basis .

for smooth collection process , company appointed one Agent on commission basis . . To secure commission amount , Agent sale account receivable and pocketed commission . company already paid commission but not a to registered collection and not able to reduced Account receivable balance . In this case also , company not followed correct accounting process and not able to disclose correct financial number in the financial ,