UNIVERSITI MALAYSIA SABAH

LABUAN INTERNATIONAL CAMPUS

LABUAN FACULTY OF INTERNATIONAL FINANCE

GB30803
CREDIT MANAGEMENT

TITLE:
CASE STUDY 1: BOAT BUILDERS PYT LTD

PREPARED BY:

NO NAME MATRIC NO. PROGRAM

.
1. ROHINI D/O MURTHI BG17160657 HE20
2. SANTHANA D/O KALIMUTHU BG17110156 HE20
3. VISHNUPRRIYA D/O KALIAPPAN BG17110163 HE20
4. YASHWINI D/O SUBRAMANIAM BG17110059 HE20
5. YOGESSWAREE D/O GOVINDAN BG17110198 HE20

PREPARED FOR:

EN. RAYMOND LIEW

ANAK LUBANG

SEMESTER 2, 2019/2020

SUBMISSION DATE:

14th JULY 2020

 Table of Contents

Question 1......................................................................................................................1
Question 2......................................................................................................................2
Question 3......................................................................................................................3
Question 4......................................................................................................................4
Question 5......................................................................................................................5
References......................................................................................................................7
Question 1
The accountant has stated in the footnote to these financial statements
that the accounts ‘constitute special-purpose financial statements’.

a) What are special-purpose financial statements and how are they

different from general-purpose financial statements?

Special-purpose financial statement is a full set of financial statements where it is

prepared by special purpose framework to provide special necessities for particular clients of
financial report, it contains relevant notes and an assertion report by the liable for the
financial statement[ CITATION Mil03 \l 1033 ]. Generally, the relevant notes involving a concise
of noteworthy accounting procedures and related data. The necessities of relevant financial
statement structure decide the layout and content of the financial statements arranged as
per a special purpose framework. It gives information to small scope of clients or selected
clients. At the same time, the general purpose financial statements give information to a
large scope of clients which arranged on a general purpose framework[ CITATION Mil03 \l
1033 ]. It is given to the investors or leasers to help in decision making. This statements
issued throughout the year such as income statements, statement of cash flow and balance
sheet. The special purpose financial vary from general purpose because it is not expected to
be seen by outsiders and they have a restricted the use for others compared to the selected
clients. It is generally compiled for the utilization of internal or particular external users, for
example, organization team, financial institution or government agencies. On the other
hand, general purpose financial statements needed by various people for various purposes.
For example, owners and directors needs to make decision for the future activities of an
organization.

b) What is significance to you, as a lender, of these being special-purpose

financial statements?

As a lender, I will make sure that the organization or company can possibly repay
the loan before I approve their application and give them the loan. Moreover, as a lender, I
have to check their financial details about their entity to evaluate the loaning hazard that
can assist me with being guaranteed[ CITATION Mil03 \l 1033 ]. I have to check the level of
loss of the organization whether it is high or low. Besides, special purpose financial
statements can help me to see the performance of an organization. I can view whether the
entity give a reasonable financial report and data which is important and simple to
understand.

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2
Question 2
Identify any concerns that you have about the financial statement supplied for
Boat Builders in terms of them not accurately depicting the true position of the
business (for reasons of error, accounting assumptions, creativity or dishonesty).

The financial statements of the company are not disclosed on the inventory of the
raw materials, particularly aluminium, work in progress stock and finished products
stock[ CITATION Mil03 \l 1033 ]. The profitability of the firm cannot also be tested. The
creditor record, as indifference, owes the lender in the declaration of financial condition.
Deep Sea Fishing Enterprises Ltd (DSFE), which was in control by Boats Builders Pty Ltd. at
$35168, has stated in its declaration of financial status as of 30 June 2003, that since May
2003 DSFE have been operated by Boats Builders Pty ltd at $280000. Deep Sea Fishing
Enterprises Ltd (DSFE), which was in control by Boats Builders Pty Ltd. at $35168, has
stated in its declaration of financial status as of 30 June 2003, that since May 2003 DSFE
have been operated by Boats Builders Pty ltd at $280000. The Boat Builders recognize that
the Boat Builders would cost $95,000 in taxes in October 2003, although only a cash
position of $4,978 and a $4,000 negative overdraft balance are available. The sales charge
in the accounting process was omitted. The data indicate that the face value matures to
$22,000 in October 2003 but the financial position estimate for the Boats Builders Pty Ltd
was $216,780.

3
Question 3
Rank all of your concerns in term of their significance to you as a lender to this
business. Justify your rankings.

1- Most Significance

2- Significance

3- Less Significance

4- Least Significance

Rankings Concerns
1 Business Liquidity - This is because the liquidity and lending
measures is the most important element of cash flow. From the
debtors account, the misstatement compromises a huge sum of
($280,000-$35,168 = $244,832) that is understatement.
2 Over the inventory- This is because it specifies the liquidity of the
business from the assets.
3 Cost of discount in the bank bill- This is when bill is paid earlier,
the company will receive a discount on bank bill and cost could be
minimized. Then, net income in the operation rises. It thus had a
significant impact towards Boat Builder's liquidity.
4 From the income statement, omissions to discount charges on
billing services.
Table 1: Rankings on the concerns according to significance level

The above table shows the rankings level of all the concerns according to their
significance level in balance sheet of the account. However, the amount in superannuation
to be paid and the taxes due in the liabilities were excluded. This is because it poses a
major danger and risk to Boat Builders’ liquidity as a lender.

4
Question 4
Based on your concerns, identify 5 key questions that you would ask the
proprietors of the business about their financial statements.

(a) Why is the amount listed in the debtors' account understated and still owed by Deep
Sea Fishing Enterprises Ltd to Boat Builders $244,832 more than the value reported?
(b) What other accounting entries could have been excluded from this account given
that even the major consumer account of the entity is not taken into account for that
as a borrower in the transactions?
(c) What are the ratios of manufactured goods, work-in - progress and final product that
comprise the inventory reported in the financial statements and how long were in
stock? Validate why the stock price is the same in the last several years.
(d) Why has the tax payable and the retirement income accounts not been included in
the section on liabilities?
(e) How do you rationalize the financial statements' misstatements from the leased asset
account and the bill discount expenses?

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Question 5
In a practical lending situation, the proprietor/accountant would answer the
questions that you have identified. Potentially, this could lead to the financial
statements being modified before your detailed financial analysis commences. In
the context of this case study, there is no proprietor or accountant to provide
answers to your questions, so you are asked to modify the financial statements
based on your best guess of what the answers to your five key questions would
be. Explain and justify each modification that you would make.

A modification of these announcements is important in an offer to reduce the risk

inherent to low quality data or information provided in Boat Builders' financial statements.
The following changes are considered to be the most suitable based on the answers to the
main questions set out above.

The balance of the debtors account in the statement of financial position will be
revised to at least the amount of $280,000 owed by Deep Sea Fishing Enterprises Ltd. In
the same manner, an equal margin will also be increased in the amount of revenue reported
in the income statement. The key underlying presumption in this case is that the Boat
Builders may have made a mistake in reporting the right amounts in both accounts. In order
to manage the accounts, the two entries are required to adjust to the double entry scheme.
For this situation, it has been decided from the answer that all other debts were paid, or
else written off as bad debts with the exception of the amount owed by Deep Sea Fishing
Enterprises Ltd as well as another modification on the inventory. Therefore, the mistake was
applied only to the debt of Deep Sea Fishing Enterprises Ltd. The stock was also altered to a
number above the previous one because Boat Builders had more business in the later
period.

Two accounts are opened in the liabilities account to deal with the missed tax and
superannuation payments commitments that are due in few months. The taxes payable
account then represents a balance of $95 000, and a contra account (tax expense) is also
additionally debited with this amount as the payment was not accepted for the period ended
when preparing the reports. In addition to this, the figure reported as an expense on the
income statement as $35 922 is added to the superannuation contributions payable.

A leased asset account with the carrying sum is opened in the balance sheet as well
as a lease liability account, the last being expressed as the existing liability as it is supposed
to be paid for by the end of October when the lease ends. The payment discount is often

6
known as an expense in the income statement because it reduced the amount received on
transaction.

These modifications are presented below:

Debit ($) Credit ($)

a.) Debtors 244,832
Sales 244,832

b. Stock 15,000
)
Creditors 15,000

c.) Tax expense 95,000

Tax payable 95,000

d. Superannuation expense 35,922

)
Superannuation payable 35,922

e.) Leased asset 100,000

Lease liability 100,000

Following these adjustments, Boat Builder's records will be of better esteem and can
subsequently be assessed utilizing financial ratios with a higher level of certainty than
previously.

7
References
Sathye, M. (2003). Credit Analysis and Lending Management. Sydney: Wiley Art
Department.