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YourTel Networks (YTN) is a leader in the communicationsequipment industry for both commercial and residential needs. Itsshares trade on the Canadian TSX and the U.S. NYSE stock exchanges.The company had been experiencing unprecedented growth in companysize and stock price, but then, in the 2^nd quarter of2011, its revenues and profits declined dramatically and were wellbelow analysts’ forecasts. However, its stock price did not declinetoo much because these were only quarterly financial results.

To improve future results, YTN decided to add a newtelephone system called Magellan NorthStar. Thissystem would be produced immediately at their current operatingplant in Calgary because it is not at capacity. To finance theexpansion, the company will issue new shares. This will not be aproblem because their stock is still considered a ‘buy’ byinvestors.

As a consequence of the recent decline in revenues and profits,the Board of Directors wants to ensure the company’s earnings pershare (calculated as net income available to common shareholdersdivided by the weighted average number of common sharesoutstanding) is above analyst’s expectations for fiscal year-endingDecember 31, 2011.

Today is January 31, 2011 and you have just been hired as “a”new financial accounting manager. This is your first week on thejob and the financial accounting analyst has provided you with thedraft 2011 financial statements for your review. You notice, duringyour review, that a number of items need to be re-examined and youhave decided to write a report to the Chief Financial Officer(CFO), the person that hired you. The CFO is also on the board ofdirectors. You will submit this report within 7 days well beforethe board meeting scheduled for late February. This is not yourfirst time submitting a report of this nature and you want toimpress the CFO.

1. YTN is confident that sales of the newMagellan NorthStar system during the last half of the year willbring it back to its regular level of profitability. Customersorder these telephone systems, that can be as high as 1000 for asingle commercial customer. The customer will be invoiced as theorder is completed and the telephone systems are put into aseparate section of the Calgary warehouse and tagged with thecustomer name. But the phones will not be delivered until requestedby the customer. YTN’s bad debts expense has traditionally beenless than 1%. During the last half of the month of December, YTNproduced $100 million dollars of these phone systems and invoicedcustomers from previous experience of who has bought phone systems.The amount was booked to revenues.

2. In order to increase cash flow YTN, onDecember 10, 2011, transferred $1,200,000 of accounts receivable toRisk Financing Co. with no-recourse, notification basis, thateffectively transferred legal control to Risk Financing Co. Risk ispermitted to resell the accounts receivable without permission fromYTN. Risk charges 5% commission on the Gross accounts receivabletransferred for taking on the transfer. Although cash has beenreceived from Risk, no entries have been done by YTN for the yearending December 31, 2011.   

3. During January of 2011, YTN had startedpreparing its Statement of Cash flows (SCF). Of particular interestto you was the cash Dividends paid was placed in the financingsection for the first time. The amount was large and represented10% of the revenue for the year. Another item that would likelyneed explaining is that tax expense was now included as a separateline in the operating section using the indirect approach. In pastyears, tax expense was already deducted from net earnings andtherefore, not included as a separate line. Your review of theremaining items of the SCF is not materially different fromprevious years or unusual.

Required: (Total 30 marks)

(1) Provide a case plan which identifies themajor forces (e.g., users and their needs, constraints, managementbias, etc.) that may affect YTN’s financial reporting objectives.Be sure to keep your plan case-specific.