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The Accounting System and Financial Statement Preparation CASE 1.1 Ecotronics, Inc.* Ecotronics, Inc., a small Arizona-based manufacturer and distributor of solar energy panels, was in its first year of operation. The company was conceived and controlled by two retired executives. John Torson, an engineer by profession, developed the basic patent for the solar panels. He lacked adequate liquid re- sources to finance the venture, although he did control a fair amount of wealth. Pete Mathis' chosen field of endeavor was real estate. He, too, possessed few liquid assets. However, he owned a variety of real property including a small unoccupied building that could easily be converted into a plant for the manufacture of solar panels. An independent appraisal valued the lot at $40,000 and the building at $26,000. The two men decided to create Ecotronics, Inc., with (no par) stock issued in the amount of $100,000. Convinced that there existed excellent market opportunities for the solar panels, Torson approached a local bank in order to obtain the necessary capital. The loan officer admitted that Ecotronics appeared to be a profitable and timely venture. He claimed, however, that the bank was in no position to commit funds unless certain essential financial statements were submitted and each of the two major stockholders would agree to be personally liable for the loan amount. He informed Torson that the bank's policy would require the following information to be pre- sented: . A statement of financial position (balance sheet) classifying Ecotronic s assets and equities as they would appear in the preproduction stage e An income statement for the first year of normal operations. e A projected balance sheet as it would appear at the close of the first opera- ting year. Feeling that they had little effective choice, the two executives acquiesced. Aided by some additional guidelines set forth by the bank, they identified the following * This case was written by M. Edgar Barrett, Copyright reserved to the author. 1991 by M. Edgar Barrett. All rights The Accounting System and Financial Statement Preparation CASE 1.1 Ecotronics, Inc.* Ecotronics, Inc., a small Arizona-based manufacturer and distributor of solar energy panels, was in its first year of operation. The company was conceived and controlled by two retired executives. John Torson, an engineer by profession, developed the basic patent for the solar panels. He lacked adequate liquid re- sources to finance the venture, although he did control a fair amount of wealth. Pete Mathis' chosen field of endeavor was real estate. He, too, possessed few liquid assets. However, he owned a variety of real property including a small unoccupied building that could easily be converted into a plant for the manufacture of solar panels. An independent appraisal valued the lot at $40,000 and the building at $26,000. The two men decided to create Ecotronics, Inc., with (no par) stock issued in the amount of $100,000. Convinced that there existed excellent market opportunities for the solar panels, Torson approached a local bank in order to obtain the necessary capital. The loan officer admitted that Ecotronics appeared to be a profitable and timely venture. He claimed, however, that the bank was in no position to commit funds unless certain essential financial statements were submitted and each of the two major stockholders would agree to be personally liable for the loan amount. He informed Torson that the bank's policy would require the following information to be pre- sented: . A statement of financial position (balance sheet) classifying Ecotronic s assets and equities as they would appear in the preproduction stage e An income statement for the first year of normal operations. e A projected balance sheet as it would appear at the close of the first opera- ting year. Feeling that they had little effective choice, the two executives acquiesced. Aided by some additional guidelines set forth by the bank, they identified the following * This case was written by M. Edgar Barrett, Copyright reserved to the author. 1991 by M. Edgar Barrett. All rights

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