FICTION LTD
INDEPENDENT AUDITOR’S
REPORT AND
FINANCIAL STATEMENTS
DECEMBER 31, 20+0
04-13
INDEPENDENT AUDITOR’S REPORTTo the Shareholders of Fiction Ltd
We have audited the accompanying financial statements of Fiction Ltd, which comprise the balance sheet as at December 31, 20+0, and the statements of income, retained earnings and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Fiction Ltd as at December 31, 20+0, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.
Comparative Information
Without modifying our opinion, we draw attention to Note 24 to the financial statements which describes that Fiction Ltd adopted Canadian accounting standards for private enterprises on January 1, 20+0 with a transition date of January 1, 20-1. These standards were applied retrospectively by management to the comparative information in these financial statements, including the balance sheets as at December 31, 20-1 and January 1, 20-1, and the statements of income, retained earnings and cash flows for the year ended December 31, 20-1 and related disclosures. We were not engaged to report on the restated comparative information, and as such, it is unaudited.
Name of firm (manual signature)
By Name Last Name, chartered professional accountant auditor, accounting designation prior to the coming into force of the Act (chartered accountant, certified general accountant, certified management accountant)[1] [2] (printed)
Mont-Patelin[3], May 12, 20+1
04-13
FICTION LTD
FINANCIAL STATEMENTS
DECEMBER 31, 20+0
Table of contents
Income statement 1
Statement of retained earnings 2
Balance sheet 3 - 4
Cash flow statement (indirect method) 5
Cash flow statement (direct method) 5 (a)
Notes to financial statements 6 - 21
Complementary financial information 22 - 24
NOTES:
1. Only one cash flow statement shall be presented;
2. Items highlighted in yellow are not mandatory;
3. Items highlighted in blue highlights possibilities.
04-13
5
FICTION LTD
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20+0
20+0 / 20-1$ / $
REVENUES / 2,803,472 / 2,746,801
COST OF GOODS (appendix 1) / 1,794,971 / 1,780,508
GROSS PROFIT / 1,008,501 / 966,293
EXPENSES
Selling expenses (appendix 2) / 427,135 / 474,441
General and administrative expenses (appendix 3) / 382,500 / 243,966
Financial expenses (appendix 4) / 82,010 / 83,829
891,645 / 802,236
116,856 / 164,057
OTHER REVENUES (appendix 5) / 34,060 / 12,450
150,916 / 176,507
SHARE OF NET INCOME (NET LOSS) OF A COMPANY SUBJECT TO SIGNIFICANT INFLUENCE / 15,928 / (6,809)
GAIN ON INSURANCE CLAIM / 34,000
INCOME BEFORE INCOME TAXES / 200,844 / 169,698
INCOME TAXES (note 3) / 64,426 / 35,113
NET INCOME / 136,418 / 134,585
FICTION LTD
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 20+0
20+0 / 20-1$ / $
BALANCE, BEGINNING OF YEAR / 901,226 / 767,741
NET INCOME / 136,418 / 134,585
1,037,644 / 902,326
DISTRIBUTION TO SHAREHOLDERS
Dividends / 4,000
Refundable dividend tax (note 4)[4] / 1,500 / 1,100
Dividend tax refund / (1,000 )
4,500 / 1,100
BALANCE, END OF YEAR / 1,033,144 / 901,226
FICTION LTD
BALANCE SHEET
AS AT DECEMBER 31, 20+0
December 31 / January 120+0 / 20-1 / 20-1[5]
$ / $ / $
ASSETS
CURRENT ASSETS
Cash / 46,093 / 29,133
Term deposits / 135,812 / 82,973 / 44,821
Accounts receivable (note 5) / 366,596 / 273,992 / 131,947
Research and development tax credits / 18,000
Inventories (note 6) / 635,924 / 567,272 / 333,487
Prepaid expenses / 27,411 / 13,647 / 15,834
1,229,836 / 937,884 / 555,222
INVESTMENTS (note 7):
Investment in a company subject to significant influence at equity method / 22,348 / 6,420 / 13,229
Investments at fair value / 27,800 / 16,600 / 17,200
Other investments / 136,444 / 21,983 / 40,174
186,592 / 45,003 / 70,603
PROPERTY, PLANT AND EQUIPMENT (note 8) / 915,665 / 943,791 / 980,303
INTANGIBLE ASSETS (note 9) / 144,286 / 136,264 / 147,742
2,476,379 / 2,062,942 / 1,753,870
ON BEHALF OF THE BOARD:
DIRECTORS
FICTION LTD
BALANCE SHEET
AS AT DECEMBER 31, 20+0
December 31 / January 120+0 / 20-1 / 20-1
$ / $ / $
LIABILITIES
CURRENT LIABILITIES
Bank overdraft / 12,003
Bank loan (note 10) / 350,000 / 300,000 / 275,000
Accounts payable and accrued liabilities (note 11) / 409,651 / 321,793 / 185,648
Income taxes payable / 14,446 / 2,473 / 5,719
Current portion of obligations under capital leases / 14,594 / 2,007 / 2,007
Current portion of long-term debt / 34,009 / 35,838 / 45,058
Renewable long term-debt / 193,000 / ______/ ______
1,015,700 / 674,114 / 513,432
OBLIGATIONS UNDER CAPITAL
LEASES (note 12) / 40,220 / 54,814 / 56,821
LONG-TERM DEBT (note 13) / 185,041 / 299,547 / 335,385
ADVANCES FROM SHAREHOLDERS [6] (note 14) / 132,274 / 68,241 / 15,491
SHARES REDEEMABLE AT THE HOLDERS’ OPTION (note 15) / 25,000 / 25,000 / 25,000
1,398,235 / 1,121,716 / 946,129
SHAREHOLDERS’ EQUITY
Share capital (note 15)
Shares redeemable at the holders’ option
(redemption price of $630,000) / 30,000 / 30,000 / 30,000
Other shares / 15,000 / 10,000 / 10,000
Retained earnings / 1,033,144 / 901,226 / 767,741
1,078,144 / 941,226 / 807,741
2,476,379 / 2,062,942 / 1,753,870
04-13 The accompanying notes are an integral part of the financial statements.
5
FICTION LTD
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20+0
20+0 / 20-1$ / $
OPERATING ACTIVITIES
Net income / 136,418 / 134,585
Non-cash items:
Amortization / 144,237 / 128,126
Gain on disposal of property, plant and equipment / (30,587 ) / (6,778 )
Change in fair value of quoted shares / 9,800 / 600
Share of (net income) net loss of a company subject to significant influence / (15,928 ) / 6,809
243,940 / 263,342
Net change in non-cash working capital items (note 16) / (93,189) / (240,744)
150,751 / 22,598
INVESTING ACTIVITIES
Cash from (acquisition of) term deposits / 17,161 / (38,152 )
Cash from advances to a company under common control / 18,191
Advances to a company under common control / (114,461 )
Acquisition of investments / (24,000 )
Cash from investments / 3,000
Acquisition of property, plant and equipment / (143,633 ) / (166,645 )
Proceeds from disposal of property, plant and equipment / 69,587 / 93,287
Acquisition of intangible assets / (19,500 ) / ______
(211,846 ) / (93,319 )
FINANCING ACTIVITIES
Net change in bank loan / 50,000 / 25,000
Loan from a director / 100,000
Advances from shareholders / 64,033 / 52,750
Repayment of obligations under capital leases / (2,007 ) / (2,007 )
Repayment of long-term debt / (23,335 ) / (45,058 )
Issuance of share capital / 5,000
Dividends / (4,000 )
Net charge of refundable dividend taxes / (500 ) / (1,100 )
189,191 / 29,585
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS / 128,096 / (41,136 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR / (12,003 ) / 29,133
CASH AND CASH EQUIVALENTS, END OF YEAR (note 17) / 116,093 / (12,003)
04-13 The accompanying notes are an integral part of the financial statements.
5 (a)
FICTION LTD
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20+0
20+0 / 20-1$ / $
OPERATING ACTIVITIES
Cash receipts from customers / 2,683,143 / 2,129,345
Cash paid to suppliers / (1,520,127 ) / (1,093,152 )
Cash paid to employees / (896,863 ) / (897,468 )
Interest paid / (82,010 ) / (83,829 )
Interest received / 1,811 / 1,081
Dividends received / 5,250 / 4,980
Claim received / 12,000
Income taxes paid / (52,453 ) / (38,359 )
150,751 / 22,598
INVESTING ACTIVITIES
Cash from (acquisition of) term deposits / 17,161 / (38,152 )Cash from advances to a company under common control / 18,191
Advances to a company under common control / (114,461 )
Acquisition of investments / (24,000 )
Cash from investments / 3,000
Acquisition of property, plant and equipment / (143,633 ) / (166,645 )
Proceeds from disposal of property, plant and equipment / 69,587 / 93,287
Acquisition of intangible assets / (19,000 ) / ______
(211,846 ) / (93,319 )
FINANCING ACTIVITIES
Net change in bank loan / 50,000 / 25,000
Loan from a director / 100,000
Advances from shareholders / 64,033 / 52,750
Repayment of obligations under capital leases / (2,007 ) / (2,007 )
Repayment of long-term debt / (23,335 ) / (45,058 )
Issuance of share capital / 5,000
Dividends / (4,000 )
Net charge of refundable dividend taxes / (500 ) / (1,100 )
189,191 / 29,585
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS / 128,096 / (41,136 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR / (12,003 ) / 29,133
CASH AND CASH EQUIVALENTS, END OF YEAR (note 17) / 116,093 / (12,003 )
04-13 The accompanying notes are an integral part of the financial statements.
9
FICTION LTD
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 20+0
1. GOVERNING STATUTE AND NATURE OF BUSINESS
The Company, governed under the Business Corporations Act (Québec), manufactures gadgets.
2. SIGNIFICANT ACCOUNTING POLICIES
Financial reporting framework
The financial statements were prepared in accordance with Canadian accounting standards for private enterprises (ASPE) and include the following significant accounting policies:
Use of estimates[7]
The preparation of these financial statements, in accordance with Canadian accounting standards for private enterprises, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the current period. The most subjective estimates relate to the research and development tax credits. Management believes that these estimates are appropriate. However, actual information could differ from that determined based on these estimates and assumptions. These estimates are reviewed periodically and adjustments are made to income in the year they become known.
Revenue recognition
Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and ultimate collection is reasonably assured.
Income taxes
Income taxes are accounted for using the taxes payable method.
Financial instruments
Measurement of financial instruments
The Company initially measures its financial assets and liabilities at fair value, except for certain related party transactions which are measured either at the carrying amount or the exchange amount. They are subsequently measured at amortized cost, except for other investments, advances from shareholders and shares redeemable at the holders’ option which are measured at cost and investments in quoted shares which are measured at fair value. Changes in fair value are recognized in net income.
Impairment
Financial assets measured at cost or amortized cost are tested for impairment when there are indicators of impairment. The amount of write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.
04-13
9
FICTION LTD
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 20+0
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments (continued)
Transaction costs
The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.
Cash and cash equivalents
The Company policy is to disclose bank balances under cash and cash equivalents, including bank overdrafts with balances that fluctuate frequently from being positive to overdrawn and term deposits with a maturity period of three months or less from the date of acquisition.
Inventories
Inventories are measured at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. The cost of goods in process and finished goods consists of raw materials, direct labour and overhead.
Investments
The investment in a company subject to significant influence is accounted for using the equity method.
Property, plant and equipment
Property, plant and equipment are recorded at their historical cost, less the related government grants and investment tax credits. Amortization is determined under the following methods and rates: