Accounting Theory/Framework (50 minutes)
TOPICS: conceptual framework objectives of financial reporting
Question Part I - Clearly Carduvian Limited (20 minutes) Clearly Carduvian Limited (CCL) was incorporated under the Canada Business Corporations Act and is listed on the Alberta Stock Exchange. CCL's primary source of revenue is from the sale of water from Buffalo Lake, Alberta. The water is reputed to have a favorable effect on the consumer's health in addition to a distinctively unique taste.
CCL sells this water to independent bottlers that bottle and market the product across Canada. These independent bottlers buy their product exclusively from CCL.
In the past, CCL has recognized revenue at the point when the water is shipped to these bottlers. On November 29, 2000, one month prior to the fiscal year end, CCL announced that the price of its water would increase commencing in the new year. As a result, the bottlers made very heavy purchases of water in the month of December 2000. Historically, December sales represented only 3% of yearly sales, but this year they mushroomed to over 25% of yearly sales.
CCL would like to defer the profit on what they consider to be "excess" sales generated as the result of the looming price increase. CCL believes that 2001 sales will be lower because of the bottlers' overstocking to beat the January price increase. Management of CCL is convinced that bottlers are overstocking due to the frank and open discussions that they have had with the bottlers. If deferring this revenue will not be acceptable to the company's auditors, management would prefer to treat these "excess" sales as consignment sales, with the recognition of revenue taking place in 2001 or when the bottler eventually sells this product.
CCL has approached you, Erin Greene, CMA, to provide an analysis of the financial accounting issues raised above.
As Erin Greene, CMA, provide the analysis requested by CCL.
Part 2 - The...