No need to solve part 1. However, you will need part 1 info

No need to solve part 1

Accounting

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Net Income Before Taxes

Income Taxes (30%)

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No need to solve part 1. However, you will need part 1 info for part 2 requirements.

CASTRIES MERCHANDISING INC.

Part 2 To simulate a CPA Canada CFE Day 1 style case, this Part 2 simulation will facilitate as the extension to Part 1. That is, Part 2 will use case facts from Part 1 and provide new case facts that you should use in responding to the case requirements.

You are to assume the same role as in Part 1 for Part 2.

Using Part 1 and 2 case facts, respond to the below questions:

Required

Analyze the accounting issues for inventory and accrued liabilities (using the diamond approach). (20)
The following Statement of Operations and excerpts from the Statement of Financial Position have been restated with the required IFRS adjustments for inventory and accrued liabilities:

Castries Merchandising Inc.

Restated Excerpts from the Statement of Financial Position

For the year ended December 31

(In $EC) (audited)


	2016	2017	2018
Inventories	9,926,177	8,982,920	8,236,882

Adjustment - Reserve

1,102,909

2,223,556

3,385,827

11,029,086

11,206,476

11,622,709

Accrued Liabilities	404,987	543,987	674,902
Adjustment - Software	(80,000)	(160,000)	(240,000)
Adjustment - Staff Training	(50,000)	(100,000)	(150,000)

,987 283,987 284,902

Castries Merchandising Inc.

Restated Statement of Operations

For the year ended December 31

(In $EC) (audited)

	2016	2017	2018

Sales	47,047,701	50,632,830	54,432,786
Cost of Sales	28,754,498	30,881,135	33,240,381

1,162,271

22,354,676

Adjustment - Provision -1,102,909 -1,120,648

Gross Profit 19,396,112 20,872,342

	41.2%	41.2%	41.1%
Selling and Administration Expenses:

Administration	6,149,576	6,252,387	6,389,654
Amortization	987,243	1,052,834	1,150,903
Professional and Office	389,554	357,453	331,765
Software Costs	135,723	139,398	140,552
Adjustment - Accruals	-80,000	-80,000	-80,000
Staff Training	127,408	131,287	135,350
Adjustment - Accruals	-50,000	-50,000	-50,000

Wages and Other Benefits 8,015,822 8,331,007

15,675,326 16,134,366


Net Income		2,604,550	3,316,583	4,092,865

Calculate the amount of tax that would be reassessed for CMI for 2016, 2017 and 2018. (3)

Project CMI’s statement of operations for the years 2019, 2020 and 2021 with the following assumptions: (22)

1. Use the information obtained in the excerpts for the statement of operations
2. Sales to increase by Gabby’s estimate
3. Use 58.8% of sales as cost of sales (before considering d. below) based on the 2015 results, which were not adjusted by Gabby
4. Reverse the three adjusting entries Gabby recorded for each year for cost of sales, software costs and staff training as follows:
  1. 2019: No reversals to be made
  2. 2020: Reverse 2016’s adjusting entries
  3. 2021: Reverse both 2017 and 2018 adjusting entries
5. All other expenses to increase by 3% per year
6. Tax rate remains the same rate

Now that you have projected the Statement of Operations for the following 3 years in Question #3: (13)
1. Overall, what impact may your analysis and findings have on CMI’s share price during and after the escrow period?
2. Aside from saving income taxes, what other motivation might the family have to reduce income from the previous periods (2016-2018)? Hint: you should examine the unadjusted Part 1 financials to the restated financials given above in Question #2 while considering the effect of your projections in Question #3.

As Gabby is a member of the Ontario Institute of CPAs, what professional responsibilities might you have for reporting her professional conduct? (5)
What implications do the financial statement auditor’s actions have on the tax audit and other tax payers? (5)