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
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
Also, the Wu’s consume resources such as utilities and property
taxes for personal use but these amounts are reflected in KCS’s
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
Must be considered independent of the purchase of the business
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