Cedar Valley Garden Center: Cash-Basis Statements and a Disputed Tree Order
Cedar Valley Garden Center, a $1.8 million retailer, is applying for a $250,000 bank loan and has submitted statements prepared on a cash basis by its bookkeeper. In the most recent year the owner shipped $96,000 of custom-grown trees to three landscapers in the last week of December; the invoices were dated December 26–30, were still unpaid at year-end, and appear nowhere in the statements. A $72,000 purchase of nursery stock received November 28 was recorded in January, when it was paid. Year-end inventory includes $18,000 of stock that winter-killed in the yard. Separately, in October the owner orally agreed to buy 500 ornamental trees at $140 each from a grower. The grower mailed a written confirmation listing 500 trees at $155 each; the owner filed it without replying. The grower has now shipped and invoiced at $155, and the owner refuses delivery.
1. Restate the reported net income to an accrual basis. Show each adjustment, its direction, and its net effect, and state any figure you cannot compute from the facts given.
Read the worked answer
Work each item separately, because direction matters more than size:
- $96,000 of December shipments. Revenue was earned when title transferred on shipment, so add $96,000 to revenue and add the cost of those trees to cost of goods sold. The facts give no cost figure, so state the assumption. At a 45% gross margin, gross profit rises by about $43,200.
- $72,000 received November 28, paid in January. The cash-basis statements never recorded the expense at all, so accrual accounting requires adding $72,000 of cost of goods sold to the current year and removing it from next year.
- $18,000 of winter-killed inventory. Write down to net realizable value, likely near zero: an $18,000 loss.
Net effect on pre-tax income using the 45% assumption: +43,200 − 72,000 − 18,000 = −$46,800.
The cash-basis statements therefore overstate income, which is the opposite of what the owner expected. The analytical point the case tests: no restatement is complete without the cost of goods shipped on those three December invoices, so request the grower's cost records before anyone signs a statement.
2. The grower sues for the $155 price. Analyze enforceability under the UCC: does the statute of frauds bar the claim, and is the $155 price binding?
Read the worked answer
Framework. Trees severed for sale are goods, so UCC Article 2 governs. A $77,500 oral contract must satisfy the statute of frauds under 2-201(1).
The merchant confirmation rule. Both parties are merchants. Under 2-201(2), a written confirmation sufficient against the sender and received by the other party satisfies the writing requirement unless the recipient objects in writing within 10 days. The owner filed the letter and said nothing, so the quantity term - 500 trees - is enforceable despite the oral agreement.
The price is a different question. The confirmation's $155 does not automatically bind the buyer just because it was unanswered. It conflicts with the agreed $140, and the writing can be explained by evidence of the actual price. A merchant's written confirmation that materially alters a term operates as a proposal for addition under 2-207, and the owner's silence did not accept it. If the agreed price cannot be proved, 2-305 supplies a reasonable price at the time of delivery.
Practical answer. The owner cannot use the statute of frauds as a shield. The real exposure is $15 per tree plus cover damages if she refuses delivery. Her remedy is to object in writing immediately and negotiate, not to refuse the shipment outright.
3. The owner wants to submit the cash-basis statements as prepared, with no note about the December shipments. What is your obligation as the preparer, and what steps do you take?
Read the worked answer
The obligation. Knowingly submitting statements you believe are misstated, without disclosure, is a misrepresentation to a lender. It exposes the owner and the preparer to civil liability under state fraud and deceptive-practice statutes and to professional discipline; preparer rules require that you not be associated with misleading financial information and that you be candid about material facts.
Steps, in order.
- Document the adjustments and give the owner a written summary, including how a bank credit officer will read the current numbers.
- Offer a defensible path: restated accrual-basis statements with a clear basis-of-accounting note, or cash-basis statements prominently labeled as such with the December shipments and the January purchase disclosed in a note.
- If the owner insists on the unadjusted version, decline to prepare or submit it, and record the refusal in the file. Withdraw from the engagement if the pressure continues.
The framing that usually works. Nothing in these facts suggests the loan is undeserved - the correctly disclosed numbers still describe a real business. The issue is disclosure, not whether the business qualifies, and an undisclosed adjustment discovered after funding is far worse for the owner than a smaller loan.