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Solution to Kenaston Convenience Store.docx

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ACC 110

CASE 9: Kenaston Convenience Store Role: •Site evaluator for Community Mart Ltd. Responsibility is to assess the appropriateness of financial statements prepared by convenience stores that may be acquired. Key users: •The only user of relevance is the management of CML. Key facts: •KCS is a proprietorship/partnership (there is no Ltd. or Inc. in the name thus indicating that it is not a corporation). •There are transactions that blur the definition of an entity because personal and business activities are mixed. •The financial statements are prepared for the bank and for tax purposes. •The financial statements do not appear to have been prepared for the needs of CML. Constraints: •None stated. CML should suggest accounting methods that will provide it with the information it needs to evaluate KMS. It does not have to be bound by any constraints. Objectives: •Restate financial statements to obtain are realistic indication of how KCS will perform as a part of the CML chain. (Actual restatement is not possible with the information provided but this is the orientation students should take.) Issues: •KCS is not incorporated  There can be significant overlap between the personal and business activities that will make the financial statements difficult to interpret.  The Wu’s live in an apartment above the store, but there is no indication of rent revenue (there probably isn’t any).  CML will have to assess what to do with the apartment.  Will it be rented and therefore provide additional revenue?  Will it be used for other business purposes such as storage?  This issue is also related to ownership of the building itself (see below).  Also, the Wu’s consume resources such as utilities and property taxes for personal use but these amounts are reflected in KCS’s financial statements.  This approach likely reduces taxes for the family but may misstate the financial statements.  On the other hand if the apartment isn’t rented out by CML these costs would have to be absorbed by the business.  It may be possible to put the apartment space to more productive use, perhaps as additional shopping space.  If CML only rents space and rents only the lower floor the costs associated with the upper floor would be not be incurred. There would be rent expense, however. •Will CML buy the building?  If the building is to be purchased it will have to be paid for over and above the price for the business itself.  What is its market value? Consider hiring a valuator to determine a price.  Must be considered independent of the purchase of the business itself.  If the building is purchased consideration must be given to the apartment. Will it be rented (additional revenue plus coverage of utilities, property taxes, etc.)?  If not rented it should be put to productive use (extra selling space
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