Codification Research Case

Employees at your company disagree about the accounting for sales returns. The sales manager believes that granting more generous return provisions can give the company a competitive edge and increase sales revenue. The controller cautions that, depending on the terms granted, loose return provisions might lead to non-GAAP revenue recognition. The company CFO would like you to research the issue to provide an authoritative answer.

(a)What is the authoritative literature addressing revenue recognition when right of return exists?

(b)What is meant by “right of return”? “Bill and hold”?

(c)Describe the accounting when there is a right of return.

(d)When goods are sold on a bill-and-hold basis, what conditions must be met to recognize revenue upon receipt of the order?

A financial institution has the following portfolio of over-the-counter options on sterling:

A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.

Is it possible to find a position in the traded option and in sterling that make the portfolio gamma neutral, vega neutral and delta neutral? Explain.        

Consider a portfolio dependent on the price of a single asset that is delta neutral, with a gamma of -6000 and a vega of -9600. Suppose that a traded option (called Option 1) with a delta of 0.3, a gamma of 0.5 and a vega of 1.0 is available.

1. How could the portfolio be made delta and gamma neutral?
2. How could the portfolio be made delta and vega neutral?
3. If another traded option (called Option 2) with a delta of 0.7, a gamma of 1.2 and a vega of 1.6 is available. How could the portfolio be made delta, gamma and vega neutral?

A financial institution has the following portfolio of over-the-counter options on sterling: Type, Position, Delta of Option, Gamma of Option, Vega of Option ,Call -2,000 ,0.5, 2.2, 1.8; Call -1000, 0.8, 0.6 ,0.2 ;Put -4,000 ,-0.40, 1.3, 0.7 ;Call -1000 ,0.70, 1.8, 1.4;

A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.

a. Is it possible to find a position in the traded option and in sterling that make the portfolio gamma neutral, vega neutral and delta neutral? Explain.

Execu Clean is a 3-month-old start-up enterprise newly established in your area. The company provides dry cleaning, laundry and garment alteration services, with a regular door to door pick-up and delivery service. The company has a production facility as well as qualified drivers and vans. For the time being the production facility is rented and cleaning equipment is leased.

Objectives:

In providing dry cleaning, laundry and garment alteration services the company aims to:

• Establish a sustainable business by the end of the first year of operation
• Have first-year total sales in excess of R 300 000
• Producing net profits

Mission and Vision:

Services are offered with free pick-up and delivery. High quality and convenience will save time and effort for the companies and working customers that we serve.

Keys to Success:

The business is in the first year of operation, therefore, a comprehensive marketing strategy will be the key to success of the business

It is important to remember that the customers want high-quality services, they will only use this service if they are entirely satisfied

Hours of operation must be convenient, and services must be provided timely.

Services:

Execu Clean provides services to both industrial and private customers. Customers can sign contracts with Execu Clean to get on-going and scheduled services. Orders are also taken over the phone and via e-mail. The production or operations facility is used for the installation of machines and equipment, washing and cleaning activities, storage of not yet cleaned and cleaned garments, as well as a workplace for garment alterations.

Personnel:

The owner is the director of the business and working part-time. You were employed as the general manager because of your extensive knowledge and experience in the field of business management. The company also has a laundry expert who is in charge of the operation and quality of garment cleaning and a logistics manager in charge of distribution. Two shop workers report to the laundry expert and two drivers report to the logistics manager. The laundry expert and logistics manager reports to you and you report to the owner of the business. A part-time laundry worker and driver are also employed to help out in busy seasons and in case one of the other workers get sick or have other matters to attend to.

Answer the following questions based on the case study:

To succeed in business, any organisation must have customers. Any organisation is, therefore, part of at least one supply chain. As the manager of Execu Clean, you are required to develop a possible supply chain for the business.

1. Discuss the most important elements to consider when developing a supply chain.

2. Give an in-depth discussion on how Execu Clean’s Inventory Management will affect their supply chain.

3. Give a detailed description of Execu Clean’s supply chain.

                          
       TFAC4001 Assessment 2020                  
Question 1                          
                          
Classic Dining Ltd. is considering opening a new restaurant in a rented facility.                          
It wishes to evaluate this investment over the five-year leasing period, on the assumption                           
that the equipment would be sold and the working capital recovered at the end of the 5th .                          
year                          
The following estimates in respect of the new restaurant have been prepared.                          
                          
                   €'000      
Premium on lease (capital expenditure)                    600      
Equipment and furnishing investment                   850      
Estimated disposal value of equipment at end of year 5                   100      
                          
Weighted average cost of capital                   11%      
                          
Estimates / Year           Year 1   Year 2   Year 3   Year 4   Year 5
                          
Numbers of customers           32,000   36,000   40,000   42,000   45,000
                          
Average revenue per customer           € 75   € 75   € 78   € 80   € 82
                          
Food & bev. costs per customer           € 23   € 24   € 25   € 26   € 27
Variable wages cost per cust.           € 19   € 20   € 21   € 22   € 23
                          
Fixed Costs           €'000   €'000   €'000   €'000   €'000
Annual rent (lease) of premises           425   425   425   425   425
Marketing and admin. expenses           225   200   180   180   180
Depreciation of equipment           150   150   150   150   150
Salaries           150   160   170   180   200
Apport. head office overheads           75   75   80   85   100
           1,025   1,010   1,005   1,020   1,055
                          
Profits lost in other restaur. €000           60   70   80   90   100
Working capital as % of turnover           4%   4%   4%   4%   4%
                          
Required:                          
                          
(a)   Evaluate the above project using the following methods:                      
                          
       Net present value                  
       Internal rate of return                  
       Nominal payback period                  
                          
(b)   Comment on the proposed investment                       (5.33 marks)
                           (33.33 marks)

                          
       TFAC4001 Assessment 2020                  
Question 1                          
                          
Classic Dining Ltd. is considering opening a new restaurant in a rented facility.                          
It wishes to evaluate this investment over the five-year leasing period, on the assumption                           
that the equipment would be sold and the working capital recovered at the end of the 5th .                          
year                          
The following estimates in respect of the new restaurant have been prepared.                          
                          
                   €'000      
Premium on lease (capital expenditure)                    600      
Equipment and furnishing investment                   850      
Estimated disposal value of equipment at end of year 5                   100      
                          
Weighted average cost of capital                   11%      
                          
Estimates / Year           Year 1   Year 2   Year 3   Year 4   Year 5
                          
Numbers of customers           32,000   36,000   40,000   42,000   45,000
                          
Average revenue per customer           € 75   € 75   € 78   € 80   € 82
                          
Food & bev. costs per customer           € 23   € 24   € 25   € 26   € 27
Variable wages cost per cust.           € 19   € 20   € 21   € 22   € 23
                          
Fixed Costs           €'000   €'000   €'000   €'000   €'000
Annual rent (lease) of premises           425   425   425   425   425
Marketing and admin. expenses           225   200   180   180   180
Depreciation of equipment           150   150   150   150   150
Salaries           150   160   170   180   200
Apport. head office overheads           75   75   80   85   100
           1,025   1,010   1,005   1,020   1,055
                          
Profits lost in other restaur. €000           60   70   80   90   100
Working capital as % of turnover           4%   4%   4%   4%   4%
                          
Required:                          
                          
(a)   Evaluate the above project using the following methods:                      
                          
       Net present value                  
       Internal rate of return                  
       Nominal payback period                  
                          
(b)   Comment on the proposed investment                       (5.33 marks)
                           (33.33 marks)

A car company advertises that their Super Spiffy Sedan averages 29 mpg (miles per gallon). You randomly select a sample of Super Spiffies from local dealerships and test their gas mileage under similar conditions.

You get the following MPG scores:

33 27 32 34 34 28 27 31

Note: SSx = 63.50

Using alpha =.01, conduct the 8 steps to hypothesis testing to determine whether the actual gas mileage for these cars differs significantly from 29mpg.

A car company advertises that thir Super Spiffy Sedan averages 29mpg (miles per gallon). You randomly select a sample of Super Spiffies from local car dealerships and test their gas mileage under similar conditions.

You get the following MPG scores:

33 27 32 34 34 28 27 31

Note: SSx = 63.50

Using alpha =.01, conduct the 8 steps to hypothesis testing to determine whether the actual gas mileage for these cars differs significantly from 29mpg.