Instructions
Students must work in a group of up to four students. Group allocations are posted on the discussion board. Student submission is to be uploaded to a Moodle Dropbox entitled “Case Study Dropbox”. Only one group member is to upload the following 3 files with names of all the group members:
1. MS Word file with answers to the Accountant’s questions. Use the same headings in this case to organize your response to the questions. For example, your response should have headings for Inventory, Capital Assets, and so on, with your response to each question addressed underneath each heading with the relevant question number.
2. Excel file with adjusting entries entered resulting in an adjusted trial balance and common size statement of Income for CFP and Dole
3. MS Word file with a one-page report comparing CFP to its competitor (Dole).
You may use the textbook and other materials to assist with this case study, but you are not permitted to use ChatGPT, or other AI assisted tools. Responses must be written at a level appropriate for a non-accountant to be able to understand – textbook answers will not be awarded.
Case Study Information
You have been hired as a financial consultant by CFP (Canadian Fruit Producers). CFP is a private corporation that started out by purchasing fruit from Canadian farmers and selling the fruit to retailers across the country. It then started processing fruit into finished products such as fruit roll-ups, juice, and sells the by-products for animal feed. It has finished its recent year of operations. CFP’s owners plan to list the business on the Toronto Stock Exchange (TSX) in the next 5 years; accordingly, are keen to have their financial statements reflect the business in the best light possible using the IFRS Accounting Standards. CFP’s operations are considered to be similar to Dole, a publicly listed company in the same industry. In addition to the questions outlined below, the Accountant has provided you with the following two files:
• An Excel spreadsheet with information from the CFP’s accounting records and CFP’s Statement of Income created by formulas.
• Selected Dole’s publicly available financial information.
Your consulting assignment requires you to complete the following:
1. Answer the Accountant’s questions outlined below (including any necessary adjusting journal entries).
2. Post the adjusting journal entries that you have identified in Step #1 to the Excel trial balance spreadsheet.
3. Enter Dole’s 2022 Statement of Income beside CFP’s 2022 Statement of Income and enter the formulas to prepare common size Statements of Income for CFP and Dole.
4. Prepare a maximum one-page report analyzing CFP’s financial information against Dole based on your common size analysis from Step #3.
Inventory
1. CFP has provided the following information on selected inventory items. The Accountant wants you to analyze the following information:
a. CFP has already recorded this inventory at cost in its accounting records. Consider if the inventory is being held at the proper amount on the financial statements currently. CFP’s policy is to apply the lower of cost and net realizable value to inventory as a whole.
If adjustments are required, perform the calculations in Excel (show your calculations). Provide adjusting journal entries, if necessary. Explain why you are (or are not) adjusting CFP’s current account balances and provide supporting calculations for adjustments.
Item # Item description Units Unit cost ($) Unit net realizable value ($)
1285 Strawberry bars 2,000 $1.25 $0.98
5756 Apple juice (2L) 10,450 2.10 2.99
4858 Used pulp (100 L) 32,987 0.16 0.10
9796 Cherry juice (pallet of 240 ml boxes) 45,912 24.06 39.45
2309 Peach concentrate (20 L) 15,987 19.09 16.45
b. Explain the whether the cost or net realizable value method provides the more realistic representation of inventory to the users of the financial statements.
2. CFP’s management is cost conscious and does not spend money unless the benefits exceed the amount spent. The Accountant understands that a physical inventory count is a good internal control practice; however, she wants you to provide at least three other inventory internal controls that should be implemented, along with the reason why the internal controls are recommended.
Capital Assets
1. CFP purchased land and building for $8,000,000 on September 1, 2022. The Accountant recorded this amount in the Land general ledger account because she did not know how to allocate the costs between land and building. Your research indicates that similar land could be purchased for $6,500,000 and the building was appraised at $1,500,000 for insurance purposes. CFP’s management purchased the building knowing that it needed improvements of $1,000,000 to make it usable for CFP’s needs. The Accountant recorded these improvements in the Repairs and Maintenance expense general ledger account. Management expects to sell the land for $20,000,000 and building for $4,050,000 at the end of its useful life of 20 years. CFP’s management want to use the cost method of valuing capital assets in order to save on the costs of appraising capital assets. The Accountant wants you to:
a. Allocate the cost between land and building (show your calculations). Provide an adjusting journal entry to transfer the building costs to the proper account.
b. Recommend, with justification, the appropriate accounting treatment for the $1,000,000 of building improvement costs. Provide an adjusting journal entry, if any, to properly account for the building improvement costs.
c. Recommend, with justification, the appropriate depreciation method for building. Compute the depreciation expense for the year-ended December 31, 2022 showing your calculations. Provide a depreciation expense adjusting journal entry.
2. CFP paid $1,700,000 for equipment to crate its inventory for shipping. This amount has been recorded in the Equipment general ledger account. This equipment is expected to be useful for 500,000 crates at which point it will be taken to a recycling depot. In 2022, the equipment was used to create 50,000 crates. Accountant wants you to recommend, with justification, the appropriate depreciation method for the equipment. Compute the depreciation expense for the year-ended December 31, 2022 showing your calculations. Provide a depreciation expense adjusting journal entry.
3. The Accountant calculated that $20,000 of repairs and maintenance costs were spent to fix equipment and return it to its original state after it was damaged by an employee. This amount has been recorded in the repairs and maintenance general ledger account. The Accountant wants you to recommend, with justification, the appropriate accounting treatment for costs incurred to fix the equipment. Provide an adjusting journal entry, if any, to properly account for these costs. Explain why an adjusting journal entry was required (or not required).
Current and Long-term Liabilities
1. CFP has a small retail store attached to the processing plant and began selling gift cards to customers this year beginning in December. No gift cards have yet to be redeemed and therefore no adjustment has been made for the “breakage”.
CFP expects that 94% of the gift cards will be redeemed. Assuming that in January of 2023 customers redeem $12,000 of gift cards and a further $15,600 are redeemed in February 2023. The cost of goods sold is 47% of revenue. Accountant wants you to compute the “breakage” revenue and the adjustments to the gift card liability and cost of goods sold that CFP can recognize for the next year, showing your calculations. Provide the adjusting journal entries for January and February.
*Note that since these adjusting journal entries are for 2023, they do not go into the trial balance, but rather need to be shown only in the adjusting entry section of your Excel.
2. CFP is wondering how to improve its cash flows. It is considering delaying its payments to suppliers for accounts payable. In 2021, CFP’s info related to accounts payable is as follows:
COGS $4,899,456
Inventory $2,295,000
Accounts payable $1,543,712
a. Calculate CFP’s accounts payable turnover (in times and in days) for 2021 and 2022.
b. Explain whether CPF’s accounts payable turnover has improved or worsened from 2021, and describe to the Accountant WHY this ratio has improved or worsened by looking at the change in each of the accounts.
c. If the industry accounts payable turnover is 43 days, how is CPF doing compared to the industry?
d. Other than delaying payments to suppliers, provide at least three ways that CPF can improve cash flows, explaining to the Accountant how your suggestions would improve cash flows. Ensure your recommendations are specific to this company and are not generic recommendations.
3. Calculate CFP’s debt to equity ratio for 2022. If the bank’s debt to equity covenant on the mortgage payable states that CFP’s debt to equity ratio cannot exceed 3:1, is CFP onside with the bank’s covenant? Ensure you explain why CFP is onside or offside it’s covenant.
4. Calculate CFP’s interest coverage ratio for 2022. If the bank requires an interest coverage ratio of at least 9.5, is CFP onside with the bank’s requirement? Ensure you explain why CFP is onside or offside it’s covenant.
Shareholder Equity
1. Preferred shares and common share dividends have been declared and but have not been paid. The transaction has not been recorded in CFP’s accounting records.
The following dividends were declared on December 22, 2022:
• Preferred share dividends of $100,000 and common share dividends of $90,000.
In addition, CFP is authorized to issue 50,000,000. CFP issued 12,000 new common shares on December 23, 2022. CFP’s common shares are valued at $21 per share. The Accountant wants you to provide an adjusting journal entry to record the dividend transactions (dividends declared and new common shares issued).
Ratios
1. In addition to the ratios calculated in the Current and Long-Term Liabilities section above, calculate the following ratios in the Ratio tab in Excel:
• Current ratio
• Accounts receivable turnover (use the info provided as you do not have the prior year info to calculate the average A/R balance)
• Inventory turnover (use the info provided as you do not have the prior year info to calculate the average inventory balance)