You are an accounting student who has obtained a summer internship with the national public accounting firm of Nash & Crosby. Your manager has been giving you various tasks to test your abilities and your perceptions. The firm has recently acquired a new corporate audit client, International Fashions Inc. ( IFI). Your manager has given you the previous year’s financial statements ( unaudited) and has asked you to conduct some research into the client’s operations. You are to prepare a memo in which you describe the objectives that you believe should shape the financial reporting of the company. After viewing the company’s website and searching other information sources, you learn the following information:
• The company is an Ontario corporation founded in 1976. The corporate headquarters and executive offices are near Toronto.
• The shareholders are two brothers who immigrated to Canada from Hong Kong in 1972. The brothers are both active managers of the company and its affiliates. The direc-tors are all members of the brothers’ families.
• The company operates a chain of 126 women’s fashion clothing stores. There is one store each in Toronto, Montreal, and New York City. All of the other stores are located in Hong Kong, Taiwan, Singapore, and mainland China ( P. R. C.).
• Most of the company’s clothing is produced by factories in Xiamen, China, by a separate company that is also owned by the two brothers. Two designers work full- time in the company’s headquarters near Toronto to design the clothing that is manufactured in Xiamen.
• The stores in North America are owned and operated by IFI directly. Those three stores are the “flagship” stores, intended to give an upscale North American flavour to the company’s products. To further enhance the Canadian “origin” of the company, all models used in IFI’s advertising, in all markets, are Western rather than Asian. The company prefers to use high- profile international public figures and entertainers as its fashion models. • The stores in Hong Kong, Taiwan, and Singapore are operated by three separate wholly owned IFI subsidiaries, one for each area. Some of the profits from these subsidiaries are returned to the parent company through management fees, while the rest remain in the subsidiary to finance expansion and store renewal. • The stores in mainland China are operated through an IFI subsidiary that has a local partner. As a foreign corporation, the company is entitled to special tax advantages that are not available to Chinese companies. The China subsidiary must pay 35% of the subsidiary’s net income to the partner.
• IFI, as a separate entity, currently has no long- term debt. IFI has relied almost exclusively on retained earnings to finance its growth for the past 20 years. In its early stages, the company narrowly averted bankruptcy caused by high debt and various supply problems. Since then, management has been reluctant to use debt financing. However, the company does stretch payment periods for its accounts payable and effectively forces the suppliers to bear the cost of the inventory until the product is sold. The accounts payable debt is on the books of whichever company (i. e., the IFI parent or each of the Asian subsidiaries) received the inventory. About two- thirds of the total company- wide accounts payable is owed to the brothers’ Xiamen company.
• IFI is eager to rapidly expand the number of stores that it operates in cities in eastern China. Rapid expansion will require external sources of funds. Required: Prepare the memo for your manager.

  • CreatedFebruary 17, 2015
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