1. Who will be the main users of Loaddown.com’s financial statements? What will each use
the financial statements for?
Owner: Heza Nerd, would like to see the financial statements to reflect the economic
activities of his company’s performance. He would further want to use these as a
means of internal control and feedback. Of course since he has taken a large sum to
start his new business and will most likely need further loans and for this reason
profit maximization is also important. Cash flow predictions will allow him to both
effectively make sound business decisions and to appear more attractive to potential
creditors. Finally, these financial statements will help him in management evaluation-
With no background in business he must monitor Jim Dandy.
Management: Jim Dandy, although he has agreed upon a minimal salary he will be
driven to “dress up” financial statements to the best of his abilities because his bonus
will be based on the net income of the annual income statement.
Banker/lender/potential creditor: The bank, as a lender the bank will want to use
financial statements to ensure enough cash and collateral is available. Since it has
given $100’000 as a loan and there is high probability of interest in performance
evaluation of Laoddown.com.
CRA: To ensure proper taxable income is reported and rules are followed.
2. What are the objectives of each of the users identified in 1?
Creditor – use it as an indicator of future income or cash flow since they significant impact the
ability of the company to pay back the debt. Monitor contract compliance since it is often that a
loan comes with a certain contract terms.
Management – Tax minimization and earning management. Profit maximization and
performance evaluation will be the primary concerns regarding the financial statements.
Because a stewardship relation exists he will want to prove his management skills through
earnings management. His objective will be to record expenses early and to report lower
earnings in the early periods and higher earnings at year end.
Owners - Stewardship – to ensure that resource entrusted to the manager has been used
efficiently and effectively. Management evaluation – management use it to evaluate the
performance of the manager.
Canada Revenue Agency – They use it to predict the amount of income to be paid by the
company and ensure the compliance of income tax law.
3. What revenue and expense recognition policies would satisfy each of the objectives in 2? Laoddown.com is a proprietorship, although it has been given a choice between IFRS or PE-
GAAP it would suit Heza Nerd to adhere to PE-GAAP for simplicity and more explicit
guidance. He has the option to convert to IFRS for the strategic and business reasons such as
an IPO etc.
Recording revenue as late as possible would be the objective of management however this does
not truly reflect on the underlying economic activities of the business. It would serve the owner’s
objective of performance evaluation if revenues were recorded as earned. Finally it would serve
the investors best to record revenue on sales basis. There is a great degree of moral hazard
present in this case and the financial policies chosen should be to record revenue as it is earned.
For each plan the following:
Pay as you go plan. Problem. Collection of revenue. Although the user is charged $1.00 for
every song they download, what is the likelihood of collecting the money from the user? What if
they use a stolen card? Revenue should not be recognized i