Financial Statements. Colorado & Utah Canyons Tour Company

Colorado & Utah Canyons Tour Company
Author's Name
Institutional Affiliation
Colorado & Utah Canyons Tour Company
Introduction
Hopkins, who is the founder, owner, and manager of Colorado & Utah Canyons Tour Company, has acquired our services in preparing and compiling an annual report of his company. The company has recently completed its first year of operations and has provided accounts for compilation engagement. Considering the limited business operations of the business together with its small size, the financial statements will take a few entries and accompanying notes. The business has gathered information regarding cash transactions it had incurred during the first year of operations. The accountants are provided with these details; however, the details regarding non-cash transactions are missing from the provided data. Accountants would need further information before they can compile the provided data in an understandable set of financial statements. The following report addresses key findings of the compilation engagement.
Unavailable Information
Although Hopkins have provided all the data which regarding tangible, easy-to-calculate, monetary transactions, there are a few non-monetary or subjective figures which he has ignored (Darden Business Publishing University of Virginia, 2015). Most common of these figures of income and expenses is depreciation which varies from business to business and asset to asset. Other similar entries of the financial statement, which are omitted from Hopkins’ accounts, include tax expense, contingent liabilities and provision of losses such as doubtful debt (Reutzel, 2018). All these pieces of information are further explained in the following paragraphs and are required from Hopkins before financial statements can be reliably compiled.
Provision for Depreciation
The company has not decided upon a reasonable estimate of depreciation expense on its capital assets. This provision for depreciation expense allows the business to accurately track the utilization of non-current assets in the creation of wealth for the business owners. Ignoring this figure would lead to misleading data about profitability. It owns and controls two sets of non-current assets which are snowmobiles and tourism equipment including ropes, snowshoes, and skis. First, of these sets, snowmobiles may enjoy a longer life and steady return; thus, we have accounted depreciation on them on a straight line basis. The latter of the two may give diminishing returns over its life and, thus, attracted a reducing balance estimate. However, these estimates need further validation from Hopkins who better understand the situation with these long-term assets.
Tax Expense
The company has not paid any tax for its year in operation. However, as it is expressing positive income, the company has accrued corporation tax over its profits. After considering depreciation expenses and interest paid on loan notes, the business will pay 21% of the tax for the earnings. It should be noted that the business will also deduct owner’s salary from the earnings to arrive at the taxable income figure because of the nature of the business, which is a corporation, as owners; salaries paid by companies are accounted for as tax-deductible income.
Contingent Asset
The notes given in Exhibit 2 of the case study indicate the presence of contingent asset within the company’s account. One note states that a group of customers owe the company a sum of $5000 owing to damages sustained by the latter from a blast. Although the owner is sure about the upcoming income, it still has no accompanying documents and, thus, it cannot qualify as account receivables. The business should not include these expected receipts as assets. However, a note is required within the financial statements indicating the possibility of these future earnings.
Contingent Liabilities
There is another transaction which needs further clarification from the client before inclusion in financial statements is a contingent liability that arises out of claims of the tourist. Hopkins is quick to point out that the asserted charges are wrongful as the tourist was ruthless and did not follow the rules. However, this statement only highlights one part of the transaction or lawsuit. The decision of including this cash outlay as liability rests on the probability of the outcomes of the case. If success is more probable than defeat, the business will record the expected payment as a contingent liability in the notes to the financial statement rather than the financial statements themselves. On the other hand, a disproportionately higher probability of defeat will lead to a disclosure of liability in the financial statements. Hopkins should hire services of an external legal advisor to evaluate the probabilities associated with both outcomes.
Compilation Report
Management is responsible for the accompanying financial statements of Colorado & Utah Canyons Tour Company, which comprise the balance sheets as of December 31, 2018, and the related statements of income and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed compilation engagements by Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements (American Institute of Certified Public Accountants, 2014).
Accountant
10 January 10, 2019
Colorado & Utah Canyons Tour Company

The income statement for Year ended 2018



$

$

Revenue




Trips


162,000


Retail sales revenue


23,000





185,000

Cost of sales

1


15000

Gross margin



170,000

Business insurance expense


6000


Set up costs


2000


Subcontractors' salaries


52000


Owners' salary


36000


Depreciation


10500


Rental expense


18000


ATV rentals


19800


Operating costs



144300

Gross profit



25,700

Miscellaneous expenses


8000


Advertisement expense


3200


Interest on loan notes


1100





12300

Profit before tax



13,400

Tax at 21%



2814

Profit after tax



10,586

Partnership interest



10000

Profit attributable to equity holder


586

Colorado & Utah Canyons Tour Company

The balance sheet at 31 December 2018



$

$

Current assets




Cash


35005


Inventory


900


Prepaid insurance


3000


Total current assets



38905





Non-current assets