Graphite Discount Building Supplies Limited (Graphite) is a chain of large building supply stores. Graphite sells building supplies to individuals and small contractors and builders. Until recently, Graphite was a division of another company, but the previous owner decided to sell Graphite because it wasn't in its core business. Graphite had been profitable, but the profits were small and it was consuming too much of senior management's time. A group of 25 business people purchased Graphite. None of the new owners will be involved in the day-to-day management of Graphite, but some will sit on the board of directors. The new owners paid cash for Graphite. The new owners also agreed to pay the previous owner an amount equal to 10 percent of Graphite's net income for each of the next three years (including 2017) as reported in Graphite's audited general purpose financial statements. The board of directors hired a new management team to operate Graphite. The managers will receive performance-based bonuses, in part based on net income as reported in the general purpose financial statements.
It's now mid-January 2018. Graphite is preparing its financial statements for the year ended December 31, 2017. The chair of the board of directors of Graphite has asked you to provide advice on a number of outstanding accounting issues. After the board has discussed your recommendations, they will be given to Graphite's management team for implementation. The following are the issues you have been asked to address.
a. Graphite implemented a policy that requires customers to pay an annual member ship fee to shop at its stores. The annual fee is payable when the customer "joins" and on each anniversary of joining. The fee gives a customer the right to shop at Graphite's stores and benefit from the discounts it offers. A customer has the right to cancel the membership at any time and receive a full refund of the membership fee.
The fee is refundable in full at any time during the year, regardless of whether the customer has purchased anything in the store. If a customer requests a refund, he or she is not allowed to rejoin for one year. Management estimates that about 40 percent of its customers will request refunds each year.
b. Graphite's business with most customers is transacted in cash or on credit cards.
Graphite offers credit terms to builders and contractors, allowing them up to 90 days to pay. Graphite has made special credit arrangements with a small number of struggling home builders. Graphite has extended credit terms to these struggling builders even though sales of the homes they are building have been slower than expected. In these cases, Graphite has agreed to accept payment each time a builder sells one of its homes.
c. During the year, Graphite launched a major advertising campaign to increase awareness of its stores and products. Management wanted to raise the profile of the Graphite chain in the minds of customers and potential customers so that people would think of Graphite when they needed hardware and building supplies. Costs of the campaign included television, radio, and newspaper advertising and sponsor ship of community events.

Prepare the report requested by Graphite's board of directors. Your report should:
i. Identify the likely users of the financial statements and describe the uses they will have for the statements.
ii. Identify and explain the possible objectives of financial reporting and rank the objectives. (You should respond from the perspective of an advisor to Graphite's board of directors. Recognize that different stakeholders could have different objectives.
For example, the objectives of the managers may not be the same as the board.)
iii. Are there any constraints that limit the accounting choices that Graphite can make?
iv. Identify and discuss reasonable alternative treatments for each accounting issue and make a recommendation about how Graphite should account for each issue. Your discussion and recommendations should consider any relevant constraints, facts, and objectives.

  • CreatedFebruary 26, 2015
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