Financial statements for Medicine Hat corporations

For a one-owner Medicine Hat 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 Alberta AT1, and the instalments for the year ahead.

Who reads the statements, and what they look for

The owner reads the income statement. Almost everyone else reads the balance sheet. A bank renewing an operating line looks at working capital and whether receivables and inventory support the limit. An equipment lender looks at the debt already secured against the fleet and whether earnings cover the payments. An agricultural lender looks at land, machinery, inventory and the trend over several years rather than one. A landlord on a commercial lease, or a prospective buyer of the business, looks at all of it.

Each of those readers relies on the statements following consistent policies from year to year. A balance sheet that values grain one way this year and another way next year, or records equipment purchases as expenses in a profitable year and capitalizes them in a lean one, tells a lender less than nothing. Consistency is the first quality we build in.

Equipment, financing and the fixed-asset schedule

Medicine Hat corporations tend to carry substantial equipment: service trucks and trailers, lifts and welding rigs, excavators and loaders, irrigation equipment, greenhouse structures and heating systems. In the statements, each asset is recorded at cost and depreciated over its useful life; in the tax return it is claimed through capital cost allowance by class. The two figures differ, and both need a reliable schedule behind them that matches the units actually owned.

The financing side needs the same care. A dealer-financed unit, a lease that is really a purchase, and a trade-in all have to be recorded so that the loan balances on the balance sheet agree with the lenders’ statements at the year-end date. The portion of each term loan due within twelve months is current; the rest is long-term. Getting that split right moves the current ratio, which is the number a bank looks at first.

Inventory: crops, cattle, greenhouse product and materials

Inventory is where a Medicine Hat year end most often goes soft. A grain or pulse farm with product in the bin, a ranch with calves on hand, a greenhouse with crop in the ground and packaging in the warehouse, a contractor with materials in the yard — each has inventory at the year-end date that has to be counted and valued. For a farm reporting on the cash method for tax, the inventory still belongs on the financial statements a lender reads, and the tax inventory adjustments depend on the count.

The practical answer is a count on or near the year-end date, with quantities and a stated valuation basis, kept with the year-end file. A photograph of a bin chart or a herd tally signed off by the owner is far better than an estimate made months later from memory.

Revenue that arrives in seasons and bursts

Much of the work around Medicine Hat is concentrated in short periods: a plant turnaround, a construction season, a harvest, a crop cycle in the greenhouse. Revenue and the costs that support it need to land in the period the work was done, not the period the invoice was issued, which frequently lags by weeks.

The specific traps are work completed near the year end and billed afterwards, which has to be accrued as revenue and a receivable; deposits and advance payments received before work begins, which are obligations until the work is performed; and holdbacks on construction contracts, which have their own timing. All of these are cut-off issues, all are easy to get wrong in a busy month, and all distort the year a lender is reading.

Shareholder loans and demand debt

Owner-managed corporations almost always have a shareholder loan account, and its balance needs to be right in both directions. Money the owner took out without salary or dividends creates a debit balance with its own tax consequences if it is not cleared within the permitted time. Money the owner put in is a liability of the corporation, and without a written postponement agreement it is generally shown as current, which can make working capital look much weaker than it is. A demand operating loan is also generally current in full, regardless of how long it has been outstanding.

None of those classifications changes the business by a dollar. Any of them can change how a lender reads it. The answer is to make the calls correctly and early, and to know where the key ratios sit before the statements are finalized.

Compilation, review and audit

A CSRS 4200 compilation engagement presents financial information that 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 Medicine Hat corporations, a compilation is what the bank and the tax returns require. Some credit agreements, particularly for larger facilities, specify review-engagement or audited statements within a stated number of days after year end. That obligation is contractual. Read the reporting clause in the loan agreement before deciding what kind of year end to commission.

Alberta corporate tax and the year end

Alberta administers its own corporate income tax, so an Alberta corporation files the AT1 with Alberta Tax and Revenue Administration in addition to the federal T2. Both are built from the same statements, through the general index of financial information schedules in the T2. Preparing the statements and both returns as one exercise avoids reconciling separate versions of the same year. Current rates and filing requirements are on the Alberta tax facts page, and the corporate tax hub covers the federal deadlines.

Working remotely

EverStone is a one-CPA firm with no Medicine Hat presence. Engagements are delivered entirely remotely through secure document exchange, email, video meetings and electronic signature, in Mountain Time. This suits incorporated industrial service companies, equipment and rental operators, trades and construction firms, greenhouse and farm corporations, and the small manufacturers and suppliers around them. Related pages: the Medicine Hat small-business CPA page, Medicine Hat trades accounting and Medicine Hat farm accounting.

Lender ratios are easier to manage quarterly than to discover annually. See fractional CFO support in Medicine Hat for forecasting and lender reporting through the year.

Remote financial statement work

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

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

The year end this all feeds into is our Medicine Hat 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.