Financial Statement and Taxation Compliance at ProActive Athletics Inc Assignment

Assignment Task

Introduction

ProActive Athletics Inc. (PAI) is a wholesaler of sporting clothing and equipment specializing in skiing, hockey, figure skating, and mountain climbing with operating locations in British Columbia and Alberta. PAI hired a new accountant who prepared financial statements to be presented to the auditors. As a publicly-traded company, PAI follows IFRS and is subject to a 25% corporate income tax rate.

PAI has adopted the following accounting policies.

• Basis of Accounting - Accrual basis where revenues are recorded when earned and expenses are recorded as incurred regardless of the timing of cash flows.
• Accounts Receivable - Allowance method using the % credit sales At year-end, a detailed analysis of receivable balances occurs to write-off receivables known to be uncollectible and ensure the remaining receivables are properly valued at “net realizable value”.
• Inventory – Inventory is accounted for using the perpetual inventory system with a FIFO cost flow assumption. Inventory is valued at the lower of cost and net realizable value. Impairment is assessed on an annual basis.
• Investments – Investments in shares with “no significant influence” are accounted for under the FV-OCI method. Investments in bonds are accounted for under the amortized cost model.
• Long-Term Assets – All long-term assets are accounted for under the cost model and are being depreciated using the straight-line method (with exception to land and goodwill). Impairment testing occurs on an annual basis using the Rational Entity Impairment Model.
• Revenue Recognition – Revenue is recognized when legal title to inventory transfers between buyer and The company sells to customers on 2/10, net 30 day basis. Customers can return products for refund or customer credit within 30 days of the date of purchase.

Upon incorporation, PAI was authorized to issue an unlimited number of common shares and 50,000 $2.00 non-cumulative preferred shares. At December 31, 2023 the company had 250,000 common shares and 10,000 preferred shares issued and outstanding. The total “paid in capital” from common shares and preferred shares was $500,000 and $100,000, respectively. On December 31st, PAI declared $90,000 of cash dividends to be paid to shareholders on record on January 15/ 2024. No shares were issued or repurchased during 2023.

PAI has an operating bank account held at TD Bank as well as a payroll account at Royal Bank of Canada. PAI has dealt with TD Bank since incorporation, but the payroll service agency who processes PAI’s monthly payroll insisted on PAI opening an account at Royal Bank since this is their “preferred” financial institution. As a result, PAI makes monthly bank transfers between the operating account and the payroll account to ensure all employees get paid. Both bank accounts have overdraft protection.

Case Questions

The Conceptual Framework

1. Accounting standards are built around the “conceptual framework”. Briefly explain the purpose of the conceptual framework and the role it plays in providing information that is useful for decision making.

2. Examine the draft financial In general, what aspects of the conceptual framework have been violated? What recommendations would you make for improvement? 

Correcting the Financial Statements

3. Prepare a corrected Statement of Financial

4. Prepare a corrected “multi-step” Statement of Comprehensive Income, including disclosure of Basic Earnings Per Share (EPS).

5. The junior accountant identified that the spreadsheet used to calculate depreciation on capital assets was set up incorrectly. The formulas used to calculate depreciation expense didn’t deduct estimated residual values and this mistake occurred in the current and the prior years. Briefly explain how the junior accountant should deal with this situation and the impact it will have on the financial statements.

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