Financial statements for Lethbridge manufacturers and agri-food companies

For a one-owner Lethbridge corporation, monthly bookkeeping, payroll and the year-end financial statements with the T2 usually cost from $450 to $650 a month all-in. The year-end covers the T2 with Schedule 1 and Schedule 50, the CCA schedule, the small business deduction, T4 or T5 slips for the owner’s pay, the instalments for the year ahead and the Alberta AT1.

The statements are read by a lender first

Lethbridge’s private economy leans on businesses that borrow to operate: food processors financing intake and storage, manufacturers financing materials and shop equipment, trucking and logistics firms financing tractors and trailers, contractors carrying an operating line through the season. For all of them the annual statements go to a lender, and most credit agreements contain financial covenants — a minimum working capital or current ratio, a maximum debt-to-equity or debt-to-earnings ratio, a minimum debt service coverage — calculated from the year-end figures.

Those covenants use definitions written into the agreement, and the definitions rarely match the statement captions. Whether shareholder loans count as debt or equity, whether the current portion of long-term debt is included, how earnings are adjusted: all of it is specified in the document and none of it is obvious from the statements alone. Preparing a year-end without reading the covenant definitions means finding out about a breach from the lender.

Inventory: the number that moves everything

For a processor or manufacturer, inventory is often the largest current asset and the one with the most judgement in it. Raw materials, packaging, work in progress and finished goods each need a count and a cost. Finished goods produced in-house need overhead allocated to them on a consistent basis. Product that has spoiled, aged or lost value has to be written down to what it will actually sell for. An inventory figure that is too high flatters both profit and the current ratio; one that is too low understates both.

For businesses with a harvest-season intake, the timing of the count is part of the problem. A year-end that falls when storage is full produces a balance sheet that looks very different from one that falls when it is nearly empty. Neither is wrong, but the lender reading them should be comparing like with like, which is another argument for a year-end chosen deliberately. The year-end inventory count guide covers the procedure.

Classification decisions that move a ratio

A current ratio depends entirely on where the line between current and long-term is drawn, and several of those calls involve judgement. The portion of a term loan or equipment loan due within twelve months is current. An operating line or demand facility is generally current in full, however long it has actually been outstanding. A shareholder loan left in the business for years is current unless there is a written postponement agreement.

None of those decisions changes the business by a dollar, and any of them can change whether a covenant is met. That is not an argument for choosing the convenient answer. It is an argument for making the calls correctly and early, and for knowing where the ratio sits before the statements are finalized rather than after they are submitted.

Customer deposits and work in progress

Lethbridge manufacturers that build to order, whether trailers, prefabricated structures or custom equipment, often take deposits before work starts and carry partly finished units at year-end. A deposit is not revenue when it is received; it is an obligation until the unit is delivered. A unit half-built at year-end carries its costs to date in work in progress, not in cost of sales. Contractors face the mirror version: work completed before year-end but billed after has to be accrued, and holdbacks are recognized on their own timing.

These are cut-off questions, and they are where compiled statements most often go wrong. A business that records revenue when the invoice goes out and costs when the bill is paid can show a very different year from the one it actually had.

Equipment and capital assets

Equipment-heavy businesses need a fixed-asset register that matches both the statements and the tax return. Accounting depreciation and capital cost allowance are different calculations, and the reconciliation between them is part of the T2. Assets sold, traded or scrapped need removing from both. Where equipment sits idle for a long stretch and is no longer expected to earn what its carrying value implies, a write-down has to be considered rather than deferred.

Compilation, review, audit, and what the agreement requires

A CSRS 4200 compilation engagement presents information management supplies. It provides no assurance: nothing is verified, no opinion is expressed, and it is neither a review nor an audit. For most owner-managed Lethbridge businesses, compiled statements are what the lender accepts, and they are what we prepare.

Some credit agreements specify more — review-engagement statements within a stated number of days after year-end is a common formulation, audited statements above a certain facility size. That obligation is contractual and applies whether or not it has been enforced before. Read the reporting covenant, not just the financial covenants, before deciding what kind of year-end to commission. Compilation versus review sets out the difference.

Alberta corporate tax and the year-end

Alberta administers its own corporate income tax, so a Lethbridge corporation files the AT1 in addition to the federal T2. Both are built from the same statements, and the T2’s balance sheet and income statement schedules have to agree with the statements the lender receives. Preparing the statements and both returns as one exercise avoids reconciling separate versions of the same year. Current Alberta rates are on the Alberta tax facts page; the corporate tax hub covers the federal side.

Working remotely

EverStone is a sole-practitioner CPA firm with no Lethbridge presence. Lethbridge engagements are delivered entirely online through secure document exchange, email, video meetings and electronic signature. Inventory counts are done by your staff against a count sheet we provide, with photographs and the sheets uploaded on the day.

This suits incorporated food and feed processors, manufacturers and fabricators, distributors, trucking and logistics companies and contractors. Related pages: the Lethbridge small-business CPA page, Lethbridge trades accounting and Lethbridge farm accounting.

Covenant headroom is easier to manage quarterly than to discover annually. See fractional CFO support for Lethbridge companies for forecasting and lender reporting through the year.

Remote financial statement work

All of it is prepared online. There is no Lethbridge office and no staff based there. Because the books are looked at during the year, the year-end figures and the covenant results are rarely a surprise.

An owner’s corporate and personal returns are decided together, and personal tax in Lethbridge is the other half.

The year-end this all feeds into is our Lethbridge corporate tax page.

Where a lender or an agreement calls for assurance rather than a compilation, the next question is assembling the working papers through the year.