Special-purpose financial statements is one having usefulness only to certain users. When companies file information to be used for governmental and trade statistics they need to prepare these specialized statements. General purpose financial report (GPFR) is a financial report that is required by the government or accounting professional groups to be prepared by every firm. The aim of GPFR is to give general information about the firm and it could give some information for the user to make decision, as there are many different info-based users who depend on the GPFR, which definitely could not give the comprehensive information to help those people to make decisions. But the objective is to make it a little useful to every potential user, that's why it's called general purpose financial report. General-purpose financial statements prepared not only to meet the needs of a particular group such as investors, creditors, management, or regulatory bodies but they also important for meeting the needs of all financial statement users. This is the purpose of financial statements based on GAAP (Generally Accepted Accounting Principle).
The differences between the special purpose financial statement and the general purpose financial statement is that the special purpose financial statement used by small medium company whereas general purpose financial statement is used by the large company. Besides that, special purpose financial statement doesn't need to follow the accounting standard set by the government. Furthermore, the special purpose financial statement does not included statement of financial performance for the year, statement of financial position as the end of the year, statement of cash flows for the year, consolidated version of the preceding statements, detailed notes to the financial statements and directors' declaration. In addition, special purpose financial statement is different from general purpose financial statement is the special purpose financial statement is not necessary to be audited. Last but not least, the different of special purpose financial statement is the special purpose financial statement does not need to prepare from time to time. Special purpose financial statement is prepared upon request whereas general purpose financial statement should prepare year to year.
(b)
As a lender, this being special purpose financial statement is significance is because the special purpose financial statement may shows a good and fair view of an organization. Due to the special purpose financial statement does not need to follow the accounting standard, therefore, the organization may take this advantage to show a positive image to the lender. For example, instead of using FIFO(first in first out) method to value their stock, they use LIFO(last in first out) method to value their assets to have a high asset value.
Besides that, as a lender, this is significance is because the special purpose financial statement maybe not accurate. The special purpose financial statement may not accurate because they are not audited. It is not accurate may also due to the reason the financial statement is prepare by the external accountant. The external account may not fully understand the company, so, the accountant may prepare a financial statement which is not match the company actual view.
The special purpose financial statement may less informative. The special purpose financial statement does not necessary to prepare all the statement as the general purpose financial statement. Therefore, as a lender, it is difficult a get all the information the lender need to evaluate the borrower.
Lastly, by using special purpose financial statement, the borrower may present their business in the most positive way. If freedom in the preparation and presentation of financial statement is combined with the desire to deceive the lender, it may cause great negative effect to the lender. The financial statement will end up presenting a picture of the business that is very different form the reality.
As the conclusion, the special purpose financial statement provide a fair view of the organization, not accurate information, less informative to the lender and present a picture of the business that is very different from the reality. As a lender, when evaluate the special purpose financial statement, need to be very careful due the above reasons.
Question 2
First of all, the problem appear in the financial statement is the balance in the overdraft account. There have two current balances in the overdraft account which are -$82000 and $4000 which is the information given by the Boat Builders.
The second problem that appears is the balance of the financial statement does not match the information given by the Boat Builders. The balance of fixed term loan no.1-Factory Equipment appear in the statement of financial position ($22496) is incorrect and it should be $21841 but for the fixed term loan No.2-Land it should be $58778 but not $60048. Bill Facility should be $220000 but not $216780 in the statement of financial position.
Moreover, Boat Builders should record the factory unit land in the balance sheet as $94000 (original value) instead of $103000. This is due to the historical price concept. According to this concept, all assets must be recorded based on their original purchase price.
Based on the statement of financial performance for the year ended 30 June 2003, the operating profit shown that it was the operating profit before tax, but actually the amount had included the rates and taxes. This error will affect the trial balance of the company.
Furthermore, there is an error of amount in the financial statement. DSFE has owed $280000 to Boat Builders, but in the debtor account it is stated only $35168.
According to the case stated, there is a superannuation payment which is due on November 2003. However, the amount stated with Boat Builders Superannuation Fund Loan is a zero balance. By right they should include this non-current liability as it is the accrued amount.
Last but not least, there is an omitted expenditure in the financial statement. The construction cost of factory total $230000 do not record in the expenditure account. Besides that, the interest charge on the Fixed Term Loan 1-Factory Equipment is omitted in the Expenditure Account.
Question 3
As a lender, the prior concern is about the company debt position. A company with a higher debt position will have a higher chance to face the liquidity problem. This is why a lender should concern about the overdraft account balance of the company. Based on this case, there appear two current balances of the overdraft account. Thus, it is important for a lender to make decision whether to approve the loan or not.
Secondly, the concern is about the profit of the company. A lender must understand the financial position of the company. In the case, Boat Builder has omitted two items in the expenditure account, which are the Construction Cost of Factory and Interest charge. The omission of these two items has increase the net profit of the borrower. As a lender, in order to ensure whether the borrower have the ability to repay loan will usually consider the borrower's capacity. Thus, it is important for the lender to know the actual profit of the company for decision making.
The superannuation contributions and employee contributions are actually carrying the same function. The following significance concern is the deduction of the employee contribution account will lead to an increase in the company profit. Profits are important indicator for a lender to determine the borrower's capacity to repay the loan so that the default risk will be reduced.
The fifth significance is concern about the balance in the statement of financial position which mismatches the information of fixed term loan 1-factory equipment, fixed term loan 2-land and bill facility. This is less significance because the different is not much different.
The sixth significance is concern about the operating profit before tax. The rates and taxes are already included as the expenditure in the statement of the financial performance but the Boat Builders assume the operating profit is before tax. This result will mislead the judgment of the lender.
The least important concern is that the asset value recorded based on the market price but not the historical price. This is less significance because the difference between the historical price and the market price is not much different.
Question 4
As there are two overdraft balances provided, can we know which one is the actual amount?
Why the construction cost and interest charge are not included in the balance sheet?
Why the amount of factory unit land recorded in the statement of financial position is not based on the historical value?
Based on the information given, why the values provided do not match with the values in the statement of financial position?
Why the amount of operating profit before tax that is shown in the statement of financial performance had included rates and taxes?
Question 5
The overdraft balance should be -$82000. The reason why the balance in the balance sheet is $4000 is maybe the cheque owner bank in hasn't cleared. So, the balance of owner balance sheet is different from the balance in the bank statement. Therefore, there is a different in the overdraft balance.
There are two missing item in the expenditure account which is construction cost and also the interest charge on the Fixed Term Loan 1-Factory Equipment. The amount of construction cost is $230000. The amount of construction expense is $230000 because the construction expense of the factory unit land since November have totaled of $230000. The reason why Boat Builders are omitted is maybe due to they plan to record the whole amount of construction expense after the construction of the factory unit land is finished. While the amount of the interest charge on the Fixed Term Loan 1-Factory Equipment is $311.39. Assume that the interest charge on Fixed Term Loan no.2 is similar to interest charge on Fixed Term loan no.1. Therefore the interest rate for the Fixed Term Loan no.1 is 1.14%. After consider the 1.14% of interest rate, the amount of interest payable to the Fixed Term Loan 1 is $311.39.
The amount of the Boat Builder Superannuation Fund loan is $19931 which carries forward from the previous year. The reason why the Boat Builder Superannuation Fund Loan becomes zero in the latest year balance sheet is because the company does not follow the accrual or matching concept. Because this loan will be pay in the November, so the Boat Builder are excluded this loan in their balance sheet. After consider the accrual concept, Boat Builder have the conclusion that include the Boat Builder Superannuation Fund Loan into the Balance Sheet.
The amount of the Fixed Term Loan no.1 should change from $22496 to $21841, Fixed Term Loan no.2 change from $60048 to $58778, Bank Bill change from $216780 to $220000 which is match the information in the bank. The reason the mismatching is maybe due to the careless mistake of the staff when provide the information to accountant. Because the accountant is not the in house accountant, so they did not notice about this error occur.
Company asset of Boat Builders maybe usually is valuing using market value approach. After consider the opinion and consultant from the accountant, the Boat Builders may decide to use historical price approach to value our asset. Assume that Boat Builders is accepts the suggestion from the accountant to use historical price approach. Therefore, the amount of the factory unit land will change from $103000 to the purchase price which is $94000.
We assume that Boat Builder having only one contribution account that is superannuation contribution account. The reason of this assumption is because in the previous year income statement having superannuation contribution account but there is no employee contribution account in the previous year income statement. Assume that, the minus out employee contribution account in the recent year financial statement is the dishonesty of the company to increase their profit. Therefore, the amount of superannuation contribution is now modify to $43103 which is the sum of the superannuation contribution $35922 and employee contribution account $7181.
