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Objectives

  • To develop an ability to identify and assume an assigned role.
  • To be able to identify and rank the importance of explicit issues.
  • To illustrate the importance of hidden (undirected) issues that arise from a detailed analysis.
  • To identify accounting issues (GAAP/IFRS compliance issues), assess their implications, generate alternatives, and provide recommendations within the bounds of GAAP/IFRS to meet the client’s needs.
  • To examine how accounting standards impact financial measures (ratios, covenants, etc.).
  • To prepare a coherent report and integrated analysis that meets specific user needs.

Instructions

In order to complete your case analysis successfully

  • identify the role you are playing,
  • assess the financial reporting landscape considering the user needs, constraints, and business environment,
  • identify the issues,
  • analyze the issues (qualitatively and quantitatively), and
  • provide a recommendation and conclusion.

An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content.

Respond in a single Word doc (or comparable text editor).

Background

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice is impressed with the work you have completed to date and would like to give you additional responsibility. She has asked you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.

Perfect Stitch Replica’s Limited, a nationwide distributor of low-cost imitation clothing, has an exclusive agreement for the distribution of the clothing. Sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. To date, the company's budgeting practices have been minimal, and at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression and have assembled the information below.

Additional Information

The clothing is sold to retailers for an average price of $10 each. Recent and forecasted sales in units are as follows:

Recent and forecast sales:

January (actual)

20,000

February (actual)

26,000

March (actual)

40,000

April

65,000

May

100,000

June

50,000

July

30,000

August

28,000

September

25,000

Ending inventories should be equal to 40% of the next month's sales in units.

The average cost of the clothing is $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

The company's monthly operating expenses are given below:

Variable:

Sales commissions (percentage of sales)

4%

Fixed:

Advertising

$200,000

Rent

$18,000

Wages and salaries

$106,000

Utilities

$7,000

Insurance

$3,000

Depreciation

$14,000

All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below:

Balance Sheet at March 31:

Assets

Cash

$ 74,000

Accounts receivable*

346,000

Inventory**

104,000

Prepaid insurance

21,000

Fixed assets, net of depreciation

950,000

Total assets

$1,495,000

Liabilities and Shareholders' Equity

Accounts payable

$ 100,000

Dividends payable

15,000

Common shares

800,000

Retained earnings

580,000

Total liabilities and shareholders' equity

$ 1,495,000

Notes to Balance Sheet:

*February sales

$ 26,000

March sales

320,000

$ 346,000

**Number of units:

Dollar amount of inventory

104,000

Divide by cost per unit

$ 4

Number of units

26,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month; any repayments are made at the end of the month. The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month, and for simplicity, assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.

Prepare the following budgets for the first three months of 2016:

  1. A sales budget by month and in total
  2. A schedule of expected cash collections from sales, by month and in total.
  3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
  4. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
  5. A cash budget. Show the budget by month and in total.
  6. A budgeted Income Statement for the three-month period ending June 30. Use the variable costing approach.
  7. Provide a budgeted Balance Sheet as at June 30th.

Evaluation

Case Analysis 3 will be marked in its entirety out of 100. The following rubric indicates the criteria students are to adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated

% of Final Grade

1.

Identification, Analysis of Issues, Recommendation (100%)

a. Calculate the sales budget.

/5

b. Calculate the cash collections from sales.

/10

c. Calculate the purchase budget.

/10

d. Calculate the cash disbursements for merchandise purchases.

/10

e. Calculate a cash budget.

/25

f. Provide the budgeted income statement (using variable costing).

/20

g. Provide the budgeted balance sheet.

/20

Total

/100

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