Guillemette Gounod is CEO of the Gounod Corporation, a manufacturer of smartcards and electronic personal identification devices.
1 Despite the figures you can observe in the comparative income statements, sales activity of X1 is significantly greater than that of period X0. Several major customers, essentially government and semi-government agencies with unused budget allowances in X0, had paid in advance in X0 for deliveries that did not take place until early X1. This has shifted sales that really took place in X1 towards X0, thus creating the erroneous perception that X1 sales are only 10 percent greater than those of X0. In reality the sales of your company have, actually, increased brilliantly by 40 percent in X1 over a ‘normal’ X0. This is quite an achievement in this down economy.
2 Further to this understatement of the X1 sales, our X1 purchases have been inflated because we accepted early delivery of about three months’ worth of card readers we purchase from MG-Electronics. MG-Electronics is a subsidiary of Silver Electric International and the CEO of MG-E asked us, and we accepted, to help him meet his X1 sales growth target by accepting early delivery and invoicing. His unit was particularly hit by the downturn in the economy and we were happy to help a key supplier. In addition, as a counterpart to this early delivery and invoicing, credit terms was extended to six-month from the actual delivery, thus this agreement will have no impact on our cash situation, especially since we have plenty of available storage space. These two events together, deflated sales and inflated purchases, affect negatively the reported income of X1, as you can well understand.
3 You will observe that the balance sheet shows an asset called ‘capitalized R&D’. The net addition, this year, to that asset has been lower than last year. The R&D team is involved in a long-term project, a next generation smartcard, which we do not expect to see hitting the market for another year at least. The headcount of our R&D team has been reduced this year by one person, due to our seconding Dr Thaddeusz Czapik to PT-Microelectronics to work on the development of the new generation of microchips we will use in our new smartcard.
4 As you know we capitalize the work (engineering and legal) that leads to our registering patents to protect our intellectual capital. In X1 we are valuing the new patents registered in our name at 160,000 CU, down from 340,000 CU in X0. I have been worried by this downward trend and have investigated. I found our patents department has been understaffed due to long sick-leaves of two of its members (and no suitable replacement was procured) and is way behind in filing applications for new patents.
5 Our company’s reputation and market share have been increasing significantly. I have been asking, repeatedly, our external auditor to allow us to recognize, as an asset, this increase in value of the firm due to both our name and the quality of our products and labor force in the larger sense. The auditor refused once again to recognize this value creation, fruit of the labor of my team and I will later propose a motion to change auditors.
6 Our tangible assets are essentially numerically controlled machines, which still work magnificently well in the manufacturing of our products. These machines have not lost any of the potential they had when we bought them. However, I have had to reluctantly accept the demand by the CFO to depreciate them on the balance sheet. Fortunately the machines were purchased before a price increase. Therefore, despite that added cost of depreciation, we are still comparatively the most cost-competitive producer in the market, despite our older equipment.
7 The chief accountant has told me that each year he chooses the best methods for depreciating the building and fixtures in order to minimize taxable income. This year I understand we used the straight-line method but last year we had used a form of accelerated depreciation (the declining balance method).
8 My last remark again leads me to be critical of our external auditor. I still do not understand why we are not allowed to build a provision for the cost of laying off all or most of our personnel. Such a provision would, of course, reduce taxes if it were allowed by the tax authorities but, mainly, it would give us a true and fair view (accountants have been using this buzzword around me too much!) of the situation of our company in case of a continuation of the downturn in the economy.
Ms Guillemette Gounod seems to have an incomplete understanding of some key accounting principles. For each of the points of her speech to the shareholders, identify the relevant accounting principle(s) that may have been ignored, or applied properly or improperly and explain to her, each time it is required, the correct position she should accept.
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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