To: CFO of Athina Building Supplies Ltd.
From: IV Consulting Group’s consultants-
Purpose: Recommendations for the CFO of Athina Building Supplies Ltd.
We are writing to you on behalf of IV Consulting Group after closely examining the financial statements of your national retail and commercial building supplier chain, Athina Building Supplies Ltd.’s. We have stumbled upon several issues, which will be discussed in detail below.
We have prepared an insightful report on our findings and recommendations as asked for by the CFO of the national chain. Though the CFO is whom we are reporting too, we have considered how our advice will affect other key stakeholders of Athina such as the investors and CRA (assuming it is a Canadian firm),…show more content… With this attempt, they are also not violating the matching principle in case they do make sales in 2018, then they will have the write-off cost to match with their revenue (Refer to Appendix 2).
ISSUE 4 From examining the income statement and balance sheet for the year-end 2017, we learned that Athina purchased fairly old and poor condition heavy equipment at an auction for $225,000 and thus it needed repairs worth $125,000. These repairs prolonged its life for at least another ten years. The $225,000 was capitalized and $125,000 was expensed. Whether the $125,000 is a repair expense or betterment, is ambiguous therefore it is up to Athina to decide if capitalizing or expensing it is more beneficial to their reporting objectives. We as consultants believe, the repair cost of $125,000 should not have been expensed, but rather capitalized making the equipment worth $350,000 (225,000+125,000). Although the $125,000 was the cost to repair the old equipment, it was made to improve the asset and increase its useful life hence making it betterment. When this asset is capitalized, the cost would be spread out over ten years and just the yearly depreciation would be expensed. By eliminating the repair expense of $125,000, the net income and retained earnings are increased, subsequently, and comply with the CFO’s objective. Since income maximization is the
