Creative brief
Culminating Part 3: Case Study Analysis
The following case has been adjusted from Canadian Financial Accounting Cases (Lento, C. Ryan, John Wiley and Sons 2013).
Billy’s Boats Ltd.
Billy’s Boats Ltd. has been in the Yacht building business for the last 20 years.  Basically, Billy, the owner, builds high priced boats that take on average 2 years to build.  His reputation is such that Billy has never had to advertise.  Rather, potential customers contact him, having heard of Billy through word of mouth.  Billy has never had a dissatisfied customer and prides himself on his high quality workmanship.
In the past, Billy has always done his accounting on a cash basis, that is expenses and revenue were only recorded when cash changed hands.  Also, Billy has never had to turn to debt or equity financing to fund boat construction as his business has always had enough money to purchase the equipment and materials to build the next boat.  Last year however, as the owner, Billy withdrew a significant amount of money from the business for personal use.  He used this money to purchase his dream cottage.
As a result Billy no longer had the cash available to purchase the materials necessary to build the next boat.  For the first time Billy would have to find a way to finance the construction of his next boat.  He chose to finance his operations through debt financing by going to the bank for a loan.  The bank told Billy that they would be happy to lend him the money as long as his financial statements reflect  GAAP standards and that his company’s Debt/Equity ratio does not exceed 2:1 (i.e. Total liabilities are not double that of his total equity). Billy promised to produce financial statements that follow GAAP.
Billy was not very worried about repayment of the bank loan as he had just received some very large orders.  As a matter of fact, he had just hired several assistants to help him get his boats built on time.  Billy also rented an additional barn in the local area so he could work on two boats at the same time.  The barn that he normally rented was not big enough to house all the boats.  Billy also hired a secretary to help keep up with the filing of the paperwork.
For the first time, Billy has a customer who placed a large order and a signed written contract.  Billy felt that the contract was required due to the size of the boat and the expensive special materials that had to be ordered.  All other agreements were verbal.  The key terms of this new contract were:
Purchase Price:  $500,000
Delivery Date:  June 30, 2017 (in approximately 2 years)
Down Payment:  $50,000 upfront; $100,000 on June 30, 2016, the remainder                        due on delivery
Insurance:  Billy must cover the cost of insurance while the boat is being built.  (Billy just included this as a cost of building the boat and passed it on to the customer in the selling price of the boat).
Acceptance:  Purchaser can test the boat prior to making the last payment.
Purchaser can refuse to accept it if not satisfied (within reason).

At December 2015, Billy completed about two thirds of the work on the boat and was ahead of schedule.  However, on the other boats, work was behind and they were only 10% complete.

Billy has come to you, his friend, a professional accountant, for advice on how to prepare the financial statements.

Approaching a Case Study
I have assembled the following tips for Case Study analysis from the book Canadian Financial Accounting Cases (Lento, C. Ryan, John Wiley and Sons 2013).
As I have mentioned in class when looking at a case or “thinking questions” we want to look beyond the obvious.  For example is there anything in the information that you are provided with that would have you look at the accounting scenarios differently or cause you to treat the situation in a manner not so obvious?   The following are points given by the Lento and Ryan as important points to follow for Case Analysis.
TASK:
1.  Identify your perspective.  What is the role you are playing?
Are you an employee? Are you management? As you can imagine the perspective you take will make a difference in how you interpret the problem.  For example, if you take the management role in the case you may also want to put yourself in the employee’s shoes and outline how their perspective may differ from yours.  By doing this decision in the case may actually change.
2.  Identify the users of the financial information.
If you know the user, you focus on the information they will need.  You want to be able to describe who the user is and the reason why they need your information?   Even though     we know external users want a company’s financial statements to help them make better business decisions (i.e. as a bank should I lend this company money?), users do not always get the information they want due to company biases.  Your case will be stronger if you are able to look at the impact of decision making on the affected parties.
3. Identify the appropriate Accounting Standards that apply to the Case
What are the “GAAPs” that will limit your accounting choices?  For example you will want to pose and answer questions relating to the accounting issue raised in the case in a manner such as the following; does the consistency principle prevent us from changing the salvage value in our treatment of deprecation?
4.  Identify the business and company environment.
Is the economy in a recession?  Are interest rates low or high? Are you just starting up? Do you have alot of cash?  How healthy have your profits been?
5. What is your overall financial reporting objective?
State the conclusion or judgement you will be making.  Your recommendations should be consistent with your objective. (i.e. as an accountant I will be providing information to the bank on the company’s behalf so the bank can decide whether or not to give the company a loan.)

6. Identify the issues
What is the financial reporting problem that needs to be resolved? There may be multiple issues and some issues may be more important than others.  Rank the issues.
7.  Identify the choices to be made related to the issues
Most issues will relate to how to account for something or how to present something in the financial statements.  There will be alternative ways to do this.  What are the alternatives?
Most issues will boil down to the following few simple categories:
recognition…should I recognize something on the financial statements or not?
measurement/valuation – what amount should I recognize? how do I measure the transaction?
Presentation/disclosure/classification – where should the item be shown, in how much detail, if any?

8.  Analyze the issues
Choose the viable alternatives and analyze the pros and cons.
Remember to analyze from different perspectives in your analysis.
Reminder…. only look at relevant alternatives.  This will be informed by your identification of the economic and company environment.  (i.e. you are not going to recommend an issue of dividends to shareholders if there is no cash in your bank). You will not suggest an alternative that goes against GAAP.
9.  Consider quantitative (numerical) an qualitative analysis.
be careful just because numbers may be provided to you may not mean that the information will be relevant to the case analysis.  You may want to look at the numerical impact of your various alternatives.  Do not get bogged down in the numbers.
10. Be case specific in your analysis
do not just regurgitate GAAP…. tell us how it applies to the case….. but be careful do not just regurgitate case facts.  (i.e. do not just repeat in your analysis the information that is already given to us in the case.  If you are going to mention case facts it should be used to support your analysis.
11. Provide your recommendations based on your analysis