Be the Banker, Smith Carson Limited

Smith Carson Limited, located in Ottawa, ON, is a thriving t-shirt manufacturer that is also involved in screen printing. It has a strong balance sheet with moderate debt, reflecting the conservative nature of its management. Total revenues are CAD 25 million.

The company supplies two major Canadian retailers that make up about 60% of its annual turnover.  The remainder of its sales are spilt between the export market (25%) and smaller independent retailers/single outlets (15%).

Smith Carson’s CFO requested a meeting with your bank, which began with a discussion of the following 2 new business opportunities.

1.Smith Carson currently purchases a large volume of raw materials from the Hong Kong and Singapore. Smith Carson normally does its own manufacturing but it has now found a very reliable supplier in Singapore, Fabrics R Us Inc. Fabrics R Us has much cheaper labour costs and are able to produce a lower cost, high quality Tshirt. Smith Carson is interested in sourcing from Fabrics R Us on a trial basis.

2.Following a recent business trip to HK, Smith Carson identified a company called Top Brands Corp in Bristol, which indicated that they are prepared to buy high quality shorts from Smith Carson.

As a result of these 2 opportunities, it is now Smith Carson’s intention to sell Top Brands, the shirts manufactured by Fabrics R Us.

Smith Carson still plans to take delivery of the shirts so that they can screen print designs on them before shipping to Top Brands.

Sales contracts and purchase orders are close to being signed between Smith Carson and the two foreign companies.  The basic terms of sale are that Fabrics R Us will supply on a prices basis of $1 per shirt CIF Toronto Port and Top Brands will purchase the shirts for $7 FOB Toronto port.

The initial contract will be for 200 shirts, with many future contracts to follow if all goes well.

Smith Carson wants to take advantage of this opportunity given the huge profit margin and it hopes to develop these two relationships into ongoing sales. There are a number of issues closing, and Smith Carson’s current Bank is unable to come to an acceptable solution.

1-

As this is Fabrics R Us’ first transaction with Smith Carson, it prefers payment in advance, particularly as the good are being shipped by air. Its reasoning is that since Smith Carson is shown as consignee, once shipped the goods will no longer be under Fabric R Us’ control.

However to make this transaction more appealing, Fabrics R Us is prepared to ship the t-shirts so that they arrive 30 days after the signing of the contracts provided that at that time, they have an assurance of getting guaranteed immediate sight payment of 100% of CIF value ($200,000) before letting the goods leave their control. Fabrics R Us will ship the full 200,000 shirts in one shipment.

2-

Top Brands is an extremely credit worthy company that normally imports on open account. Its other suppliers are in the practice of giving them N45 credit terms. To help close this deal Smith Carson will have to do the same. In accordance with Top Brands expected credit terms, this 6 week credit period will be calculated from the time Smith Carson makes shipment of the goods.

3-

At your meeting you obtain the following information. Screen printing, packing and shipment of the t-shirts to Bristol will take a maximum of 50 days from receipt of the shirts from Fabrics R Us.

Smith Carson is mainly concerned with cash flow. Given the industry most of Smith Carson’s sales are sold on terms unfavorable to their cash flow. This causes financial stress on the mgmt of Smith Carson. While they generally have enough money to meet current contracts, this new foreign export contract will stretch their cash flow too far. Smith Carson is looking to you to help complete this very important transaction.

TASK 1: Using the table below, and for each commercial contract, identify which methods of payment could be used in the contract between Smith Carson& Fabrics R Us and between Smith Carson& Top Brands Corp. Once you have completed the charts, discuss what risk your bank could be exposed to and then decide what payment term you (as the bank manager) are comfortable authorizing for Smith Carson and why.

TASK 2: Construct a timeline for the transaction. Starting at contract signing, continuing for the period covering Smith Carson’s inventory and ending with Top Brands pays out. - How many days will this transaction take from production to payment? - If you were to issue a sight or usance LC, how many days will Smith Carson be waiting for payment?

Cape Fear Marine Mini Case

Sarah Connor was recently hired by Cape Fear Marine Company to assist the company with its short-term financial planning and to evaluate the firm’s financial performance. Sarah graduated from college five years ago with a degree in finance and had been employed in the treasury department of a large firm in Raleigh, North Carolina since then.

Kyle Reese founded Cape Fear Marine Company 15 years ago. The company’s operations are located near Wilmington, North Carolina. The firm is structured as an LLC. Cape Fear Marine manufactures a diverse line of boats, ranging from low-end fishing boats to high-end luxury craft. The company and its products have received high reviews for safety and reliability, as well as awards for customer satisfaction.

The marine products/boating industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity.

To get Sarah started with her analysis, Kyle has provided the following financial data. Sarah has gathered the industry ratios for the boat manufacturing industry.

a.   Calculate all of the ratios listed in the industry table for Cape Fear Marine.

b.   Compare the performance of Cape Fear Marine with the industry as a whole. For each ratio, comment on why it might be viewed as a positive or negative relative to the industry.

Assume that there are only two countries in the world: USA and Brazil, so all international transactions are only between those two countries. The table gives the information regarding international transactions of USA in 2018:

1. Calculate the US trade balance
2. Calculate the US current account balance
3. Calculate the US financial account balance
4. Was the United States a net borrower or a net lender? Explain your answer.
5. Assume that an exchange rate of USD increased from 3.14 Brazilian Reals to 4.62 Brazilian Reals for 1 USD. Explain how this change may affect the US trade balance, current account balance, and the financial account balance.

Assume that there are only two countries in the world: USA and Brazil, so all international transactions are only between those two countries. The table gives the information regarding international transactions of USA in 2018:

1. Calculate the US trade balance
2. Calculate the US current account balance
3. Calculate the US financial account balance
4. Was the United States a net borrower or a net lender? Explain your answer.
5. Assume that an exchange rate of USD increased from 3.14 Brazilian Reals to 4.62 Brazilian Reals for 1 USD. Explain how this change may affect the US trade balance, current account balance, and the financial account balance.

Q1)The following information summarizes all cash-related transactions for BBB.Ltd in 2018:
1. BBB. Ltd had $25,000 cash in its Bank account at the start of 2018.
2. On 1 January 2018 the company took out a $75,000 loan from Arab Bank. The loan
has an annual interest rate of 15%. The interest on the loan was paid on time in 2018.
BBB .Ltd sells its products to customers on credit (the agreed credit term is 30 days).
During 2018, it received $850,000 from customers in respect of sales of inventory
made to them.
3. BBB. Ltd purchased components for its products on credit (the agreed credit term is
also 30 days). During 2018, it paid $550,000 to suppliers for purchases of components.
4. A new production line was acquired in the year at a cost of $120,000.
5. Salaries paid for the year amounted to $40,000. Various other operating expenses paid
for by the business amounted to $75,000 for the year.
6. $25,000 was paid to shareholders as dividends.
7. Last year’s tax liability to BBB.Ltd of $22,000 was settled in 2018.
Required:
Prepare BBB.Ltd’s statement of cash flows for the year to 31 December 2018 using the
direct method.

Q2)The following information had been prepared for XYZ Limited for the year to 31 December
2019.

Complete the following table below assumes that the XYZ Company adapts the flexible
budget method based on 120 % of its operating activities costs. Indicate whether the variance
is a favorable or adverse under each budgeting system (fixed and flexible budget)

(1) (2) (3) (4) (5) (6) (7)

Activity Level Fixed Budget
Flexible
Budget
(120%)

Actual Costs Fixed-
Actual

Favorable/
Adverse

Flexible-
Actual

Favorable
/Adverse

US$ US$ US$ US$ US$

Direct Materials 100,000 115,000
Direct Labor 150,000 185,000
Variables Overhead 50,000 55,000
Total Variables Costs 300,000 355,000
Fixed Costs 60,000 65,000
Total Costs 360,000 420,000

Data show that an average Canadian and American citizens hold CA $ 1500 and US 2000 of their currency respectively . Since money is bulky , it can be stolen , pays no interest and in general we do not see our fellow Canadians holding $ 1500 in where are these dollars and who is holding them ?

Consider a past M&A deal. Provide a link to information about the deal (news article, Wikipedia link, etc). Tell us who the acquirer and target were and the year the acquisition was completed. What do you think the acquirer's strategy was in acquiring this target? Explain your reasoning.

You have recently been hired as the assistant controller for Stanton Temperton Corporation, which rents building space in major metropolitan areas. Customers are required to pay six months of rent in advance. At the end of 2018, the company's president, Jim Temperton, notices that net income has fallen compared to last year. In 2017, the company reported before-tax profit of $330,000, but in 2018 the before-tax profit is only $280,000. This concerns Jim for two reasons. First, his year-end bonus is tied directly to before-tax profits. Second, shareholders may see a decline in profitability as a weakness in the company and begin to sell their stock. With the sell-off of stock, Jim's personal investment in the company's stock, as well as his company-operated retirement plan, will be in jeopardy of severe losses. After close inspection of the financial statements, Jim notices that the balance of the Deferred Revenue account is $120,000. This amount represents payments in advance from long-term customers ($80,000) and from relatively new customers ($40,000). Jim comes to you, the company's accountant, and suggests that the firm should recognize as revenue in 2018 the $80,000 received in advance from long-term customers. He offers the following explanation: “First, we have received these customers' cash by the end of 2018, so there is no question about their ability to pay. Second, we have a long-term history of fulfilling our obligation to these customers. We have always stood by our commitments to our customers and we always will. We earned that money when we got them to sign the six-month contract.” Required: Discuss the ethical dilemma you face. What is the issue? Who are the parties affected? What factors should you consider in making your decision? Your answer must specifically state what principle or concept may be violated.

October

1. S.Erickson invested $50,000 cash, a $16,000 pool equipment, and $12,000 of office equipment in the company.

2. The company paid $4,000 cash for five months’ rent.

3. The company purchased $1,620 of office supplies on credit from Todd’s Office Products.

5. The company paid $4,220 cash for one year’s premium on a property and liability insurance policy.

6. The company billed Deep End Co $4,800 for services performed in installing a new pool

8. The company paid $1, 620 cash for the office supplies purchased from Todd’s Office Products on October 3.

10. The company hired Julie Kruitas a part-time assistant for $136 per day, as needed.

12. The company billed Deep End Co another $1,600 for services performed.

15. The company received $4,800 cash from Deep End Co as partial payment on its account.

17. The company paid $750 cash to repair pool equipment that was damaged when moving it.

20. The company paid $1,958 cash for advertisements published in the local newspaper.

22. The company received $1,600 cash from Deep End Co. on its account.

28. The company billed Happy Summer Corp $6,802 for consulting services performed.

31. The company paid $952 cash for Julie Kruit’s wages for seven days’ work.

31. S.Erickson withdrew $3,500 cash from the company for personal use.

November

1. The Company reimbursed S. Erickson in cash for business automobile mileage allowance (Erickson logged 1,500 miles at $0.32 per mile).

2. The company received $5,630 cash from Underground Inc. for consulting services performed.

5. The company purchased office supplies for $1,325 cash from Todd’s Office Products.

8. The company billed Slides R Us $7,568 for services performed.

13. The company agreed to perform future services for Henry’s Pool and Spa Co. No work has been performed.

18. The company received $2,802 cash from Happy Summer Corp as partial payment of the October 28 bill.

22. The company donated $450 cash to the United Way in the company’s name.

24. The company completed work and sent a bill for $4,800 to Henry’s Pool and Spa Co.

25. The company sent another bill to Happy Summer Corp for the past-due amount of$4,000.

28. The company reimbursed S. Erickson in cash for business automobile mileage(1,300miles at $0.32 per mile).

30. The company paid cash to Julie Kruit for 14 days’ work.

30. S.Erickson withdrew $1,500 cash from the company for personal use.

December

2. Paid $1,200 cash to West Side Mall for Splashing Around’s share of mall advertising costs.

3. Paid $350 cash for minor repairs to the company’s pool equipment.

4. Received $ 4,800 cash from Henry’s Pool and Spa Co. for the receivable from November.

10. Paid cash to Julie Kruit for six days of work at the rate of $136 per day.

14. Notified by Henry’s Pool and Spa Co. that Splashing Around’s bid of $10,000 on a proposed project has been accepted. Henry’s paid a $6,500 cash advance to Splashing Around

15. Purchased $1,400 of office supplies on credit from Todd’sOffice Products.

16. Sent a reminder to Slides R Us to pay the fee for services recorded on November 8.

20. Completed a project for Underground Inc and received $6,545 cash.

22–26. Took the week off for the holidays.

28. Received $4,500 cash from Slides R Us on its receivable.

29. Reimbursed S.Erickson for business automobile mileage (500 miles at $0.32 per mile).31.S.Erickson withdrew $2,500 cash from the company for personal use

Prepare an income statement for the three months ended December 31, 2019

Prepare a statement of owner’s equity for the three months ended December 31, 2019

Prepare a classified balance sheet as of December 31, 2019

Record the closing entries for Splashing Around

Post the closing entries to the general ledger under "closing entry"

Prepare a post-closing trial balance as of December 31, 2019.