The Cyberattack on Ukraine
After Russia annexed Crimea from Ukraine in 2014, authorities started nationalizing Ukrainian-owned energy companies in Crimea. In late 2015, Ukrainian supporters physically attacked electrical power distribution centers, plunging two million Crimeans in the dark.
Each of Ukraine's 24 regions is served by a different electric company. On December 23, 2015, the Ukrainian power grid experienced a cyberattack. The activists simultaneously attacked three power distribution substations, cutting power to some 230,000 Ukrainians.
The multistage, targeted cyberattack actually started in the spring of 2015. Let's take a look at how the cyberattack unfolded.
The Spear-Phishing Attack. In the first stage, the attackers launched a spear-phishing attack on IT staff and system administrators at three of the power distribution companies in Ukraine. The attack sent e-mails to employees that contained a malicious Word file. If an employee clicked on the document, a popup window told them to enable macros for that file. If they did so, a malicious software program named BlackEnergy3 infected their computers and allowed the hackers entry into their system.
Reconnaissance. The spear-phishing attack allowed the intruders to access the power distribution companies' corporate networks. However, the intruders still had to gain access to the supervisory control and data acquisition (SCADA) networks that actually operated the power grid, but the power companies had competently separated those networks from corporate networks with a firewall. Therefore, the attackers had to search the corporate networks and gain entry to the Windows Domain Controllers. From there, the hackers gathered employee login credentials from the user accounts. Some of these login credentials were used by employees to access virtual private networks (VPNs) to remotely log in to the SCADA network. The attackers now had access to the SCADA networks.
Disabling the uninterruptible power supply. The attackers now rejigged the supply of uninterruptible power to the three systems' control centers. They wanted to cut power to the operators as well as the customers.
Disabling the converters. The attackers then coded malicious software to supersede the actual software on converters at power company substation control systems. (These converters handle data from the SCADA network to the substations.) Disabling the converters stopped employees from transmitting remote commands to reestablish power after it was cut. The converters could not work and could not be recovered. This situation meant that the power companies could not recover until they obtained new converters and incorporated them into the power system. (Note: Power companies in the United States use the same type of converters as those used in Ukraine.)
Denial-of-service attack. The attackers now targeted customer call centers, initiating a telephone denial-of-service attack. That meant that customers could not call in to report the blackout when it occurred. The attack jammed up the distribution centers' call centers with thousands of false calls, blocking actual customers from getting through. This denial-of-service attack allowed the attackers more time to work on their attack because not only were substation employees seeing false information on their hijacked computers, but they were receiving no phone calls reporting power outages.
Causing the blackout. On December 23, the attackers used the commandeered VPNs to access the SCADA networks and deactivate the uninterruptible power supply that they had already reconfigured. Then they removed substations from the power grid.
Deploying KillDisk. Lastly, the attackers deployed software called KillDisk to complete their path of destruction. KillDisk deletes or overwrites essential system files from operators' computers to disable them as well. Because KillDisk also wipes the master boot file, operators could not reboot the crashed computers.
About half the homes in Ukraine's Ivano-Frankivsk region lost power. The cybercriminals also simultaneously attacked a large mining company and a major railway. The incidents seem to have been politically motivated, meant to disable Ukrainian critical infrastructure in a strike, according to security analysts at Trend Micro (www.trendmicro.com).
Homes and businesses in the impacted areas only lost power from one to six hours. However, more than two months later, the control centers were still not completely back online. Electricity was still being delivered, but employees had to manually operate the power substations.
The attack caused only digital damage; if the substations had been physically damaged, it would have taken much longer to restore power. In 2007, the U.S. government showed how criminals could remotely destroy a power generator through a SCADA attack with just 21 lines of malicious code.
Infrastructure personnel can learn many lessons from the attack. Ukraine's power generation control systems were unexpectedly more robust than some in the United States. The reason is that the Ukrainian SCADA networks were separated from the business networks with excellent firewalls. However, the Ukrainian control systems still had security weaknesses. For example, employees remotely accessing the SCADA network were not prompted to use two-factor authentication, which enabled the hackers to steal login information and gain entry to the SCADA systems.
Another lesson is that in the United States many power systems lack manual backups. That is, if criminals were to attack automated SCADA systems in the United States, it would be much more difficult to bring the grid back online.
This first-ever successful attack of a power grid's computers is a dire safety warning for other such systems across the world. Experts in industrial control systems at the Sans Institute (www.sans.org) say the hack of the Ukrainian power grid was the first time that cybercriminals have managed to directly bring down a power grid.
In December 2016, Ukraine was attacked again. Reports alleged that a group of Russians attacked computers at a control center of a power supplier in Kiev. The attackers apparently used phishing attacks on workers, enabling the intruders to grab login information and disable substations. The shutdown affected some 20 percent of Kiev's nighttime electrical use.
Sources: Compiled from J. Condliffe, âUkraine's Power Grid Gets Hacked Again, a Worrying Sign for Infrastructure Attacks,â MIT Technology Review, December 22, 2016; E. Markowitz, âAfter Ukraine Cyberattacks, FBI and DHS Urge U.S. Power Companies to Develop Better Safety Protocols,â International Business Times, April 21, 2016; âFBI, DHS Issue Warning about Increasing Cyber Threat to Nation's Power Grid after Downplaying It in January,â Cyberwar.news, April 12, 2016; B. Gertz, âFBI Warns of Cyber Threat to Electric Grid,â The Washington Free Beacon, April 8, 2016; K. Zetter, âInside the Cunning, Unprecedented Hack of Ukraine's Power Grid,â Wired, March 3, 2016; D. Voltz, âU.S. Government Concludes Cyber Attack Caused Ukraine Power Outage,â Reuters, February 25, 2016; W. Ashford, âUkraine Cyber Attacks Beyond Power Companies, Says Trend Micro,â Computer Weekly, February 12, 2016; J. Robertson and M. Riley, âHow Hackers Took Down a Power Grid,â Bloomberg BusinessWeek, January 14, 2016; M. Heller, âRussian Actors Accused of Attacking Ukraine with BlackEnergy Malware,â TechTarget, January 4, 2016; D. Goodin, âFirst Known Hacker-Caused Power Outage Signals Troubling Escalation,â Ars Technica, January 4, 2016; J. Cox, âMalware Found Inside Downed Ukrainian Grid Management Points to Cyberattack,â Motherboard, January 4, 2016.
In: Operations Management
case study:
Spanx Inc.: Growth Dilemma for a Shapewear Leader
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Arpita Agnihotn and Saurabh Bhattacharya wrote this case solely to provide material for class discussion. The authors do nat intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder Reproduction of this matenal is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, lvey Business School, Westem University, London, Ontario, Canada, N6G ON1, (ty 519.661.3208, (e) cases@ivey ca; wwww.iveycases.com?
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Founded in 2000 in Atlanta, Georgia, United States, by Sara Blakely, Spanx Inc. (Spanx) had been, since its inception, a pioneer and market leader in the body-shaping hosiery and intimate apparel segment known as shapewear. Spanx shapewear was lightweight and comfortable, unlike traditional girdles and pantyhose. From Blakely's initial investment of only USS5.000, sales of Spanx quickly accelerated, reaching $250 million by 2012 and $400 million by the end of 2016. In March 2012. Forbes magazine named Blakely the world's youngest, self-made female billionaire. In the same year, Time magazine listed her among the world's 100 most influential people.
Spanx, apart from being the market leader, also became synonymous with shapewear. However, in 2012. doctors revealed several health problems associated with shapewear. Changes in cultural currents also meant that women were less interested in using shapewear to create an ideal body shape, New product categories, such as athleisure wear and activewear, were also launched by companies such as lululemon athletica Inc. and Nike Inc. These clothes were more comfortable to wear, and unlike Spanx, they could be worn on a daily basis.
Despite Spanx's market leadership position in shapewear, by 2015. the company's shapew was being ear perceived as a "tummy-tucking" commodity rather than a fashion statement. To combat these challenges. from 2015 onward, Spanx initiated a rebranding drive for shapewear and diversified into other fast-growing product categories such as athletic wear. Blakely's entrepreneurial spirit led to her being invited to appear as a motivational speaker on television shows such as Shark Tank. In May 2017. Forbes estimated that Blakely was worth S billion." However, would Spanx be able to manage sustainable growth in the product category it had created? Did Spanx need to be rebranded? Would its product diversification strategy pay off? What should Spanx have done to keep its momentum of growth moving against competitors?
BACKGROUND
The idea for Spanx struck Blakely in 1998, when she was getting ready for a party and realized she lacked the right underwear to provide a smooth look under her white pants. She cut the feet out of her panty hose, and hence the idea of footless pantyhose was born.10 Blakely also observed that other womenoften complained about the discomfort of pantyhose, which covered them from foot to waist." As a result, Blakely knew that demand for her product existed and she was ready to take the opportunity.
The core mission of Spanx was "To help women feel great about themselves and their poential,"" Before akely had sold fax machines, and she was sure that she would be able to sell her starting Spanx pantyhose as well." She started her business in one of her spare bedrooms, without any ernal financial help. Blakely explained, "Nobody gave me any money and I also really didn't understand that Iventure capitall world," further adding, "I did not understand how people raise money. know anything about the undergarment industry.
She worked during the day a a salesperson and spent her evenings at the Georgia Tech Library in Atlanta, Georgia, researching pantyhose patents after lawyers refused to file patents for her, having found her idea unusual. Finally. Blakely wrote the patents herself. She had also worked as a stand-up comedian, and that skill taught her that the letter "k" makes people laugh. Also. wellknown brand names at that time, such as the Eastman Kodak Company and Coca-Cola. contained the sound k. Thus, she decided that the company's brand name should include a prominent "k" sound. Furthermore, Blakely's research showed that constructed words were more attention-catching. and she therefore replaced the "ks" in the word "spanks" with an "x maintaining the same pronunciation but with an invented spelling.
her next challenge was to find a manufacturer of hosiery products; she had developed excellent sales. which helped her as she began contacting several hosiery manufacturers. Blakely mentioned, "I couldn't help but think of the days when my job was to cold call people in Clearwater to try and sell them fax machines and how many of them said "No, no, no.
However, just as lawyers had been skeptical about her patent, manufacturers were skeptical about making her product. However, Blakely did not shy away from asking for help:
â I used a lot of very confident, very powerful language, but l also asked for help. If you covered up your weaknesses, I thought you missed opportunities for human nature to want to kick in. At the end of the day, the guy [manufacturerl ended up just wanting to help me. He didn't even believe in the idea.â
Finally, Blakely found a manufacturer and after a year's effort to find appropriate knitting technology, she developed a prototype. Blakely's panty hose differed from traditional pantyhose in several ways. First with her pantyhose, cellulite was not visible. Second, it did not have rubber cords in the waistbands, but waistbands that were comfortably sized. Similarly. even leg bands were absent, eliminating thigh bulge. The Spanx prototype had a cotton gusset, which provided cool wearability. instead of the typical polyester gusset. Lastly, unlike traditional pantyhose, these pantyhose did not crease the skin at the ankle. Blakely decided to call this product Footless Bodyshaping Pantyhose, which later became synonymous with the product category shapewear.
SHAPEWEAR MARKET POTENTIAL
Shape wear had been in demand as women experienced conflicts between their actual body shape a current cultural ideals Early forms of shapewear included girdles (woven garments similar to wide belts) and corsets. Between the 1920s and 1960s. many women considered wearing these garments to be essential. Corsets were used to shape the body. through a squeezing effect. sometimes reducing the waist to as little as 20 inches (50 centimetres). Consequently. corsets at times resulted in broken ribs or a reduced ability to breathe fully Gradually. corsets were replaced with control garments or control pantyhose, which adapted the concept of the corset. smoothing bulges and bumps in the abdominal area. Because of advancements in fabric technology. demand for shapewear remained h when Spanx launched its pantyhose featuring advanced fabric. which provided more comfort, hid undergarment linings, and offered the benefits of a shapewear product.
PACKAGING
To differentiate from its competitors, Spanx packaging was brightly coloured (such as cherry red): in contrast, competitors' packaging tended to be neutrally coloured and featured images of women extending their legs. A graphic designer was employed to create images unlike those on traditional hosiery packages, such as illustrations of three women. who were fully clothed and showed the various advantages of wearing pantyhose under skirts or pants. Again, Blakely used her sales skills and comedic wit to make packaging more interesting. adorning packages with cartoons and funny captions such as "When you think everyone's looking at your train but they're really looking at your caboose," or "Don't worry, we have got your butt covered. Even the branding of Spanx products was unique and humorous: products were given such names as Bra elujah and Tight-End Tights. PROMOTING SPANX Advertisement through any channel-print, television, or radio was not an option for Blakely due to budget constraints. During Sp start-up days, word of mouth, not an advertising strategy, was a necessity. At first, Blakely stimulated artificial demand by asking her friends to purchase Spanx. later sending them reimbursement cheques She even stood in stores for hours to sell each pair herself because Spanx products were placed in obscure corners of retailers' shelves. She specifically stated. "I learned very quickly that my biggest challenge was location of the store ISpanx werel put in the sleepiest corner. Irealized. "This is going to come here and leave ifI don't personally intervene, even if i have to sell every pair myself." And that's basically what I did.
Next, to further stimulate sales. Blakely decided to target celebrities in the hopes of receiving their free endorsements. She sent a basket of Spanx products to Oprah Winfrey's television program and explained her products. The products aught Oprah's attention, and she named Span her product of the ear. In fact, Hollywood celebrity Gwyneth Paltrow publicly thanked Blakely for Spanx, claiming that Spanx made her post-baby body look better. This free publicity spurred Blakely's career. By 2003. she had become well-known among Hollywood celebrities, who started using Spanx under their Oscar gowns. By 2012. she became an international figure when Time magazine identified her as one of the world's most influential people.
Even as of 2017. Spanx did not employ any type of advertisement. As the former chief executive officer (CEO) Laurie Ann Goldman mentioned in 2012, despite the company's ability to afford any billboard in Times Square, it never publicized Spanx products. Instead, Spanx promoted a philosophy of woman to woman" advice, especially relevant in the era of social media. As Goldman affirmed:
â The power of women discovering the brand from other women was actually a better strategy. The aunt telling her niece: one woman to a college friend. There's something about saying. "Look, feel my back, no lines" that's powerful. Look at how big social media has become now. People trust advice.
Spanx thus relied on word-of-mouth marketing by it believed that woman-to-woman communication over social media would be much more powerful than paid advertising.
Similarly, Blakely decided to engage in public relations on her own; she was confident about the product and did not feel any need to hire an external agency. She stated. "I believed so much in my dream that the idea of someone pitching it who maybe hadn't even worn Spanx just completely freaked me out. So, I decided to try the public relations myself for a while But as her business grew, a public relations manager was appointed to oversee not only press coverage and media relations but also celebrity relationship management. Further, Spanx began offering several sales promotions for consumers. especially for online shopping, such as discounts with coupons or promotion codes or free shipping when buying through selected retailers. At times, the discounts offered by the company were as high as 70 per cent of the product price.
SPANX'S GROWTH STRATEGY
The cornerstone of Spanx's strategy was innovation. By 2010. Spanx started manufacturing undergarments r men under the label Manx.. Spanx continued adding product lines and variants, and by 2014. the company was selling more than 200 products. fuelling its growth (see Exhibit I) The innovations in the shapewear market had resulted, in part, from abrupt changes in fabric technology and garment design.
Spanx products were sold under different brand names, including Bod a Bing and Hide and Sleek. The company's four most well-known brands were ASSETS, Spanx, Starpower, and the Red Hot label. Spanx offered a range of compression options in a variety of products, such as tights, full slips, half slips, and camisoles, in addition to other hosiery-based products, such as knee-highs. stockings, and socks.
Industry experts noted that as a part of the company's strategic rollout, it was vital for Spanx to have its own independent stores for two reasons: to eliminate the need to fight for space in department stores and to be able to test new product launches easily and effectively, Thus, by 2012, Blakely started launching stand-alone Spanx stores in shopping malls. The first stand-alone outlet was launched in Washington, D.C., with the intent of later extending stores into Pennsylvania and New Jersey. The objective for these stores was to better connect with customers. Blakely trained the sales staff on all the product lines so that they could provide in-person guidance to help customers select the right garments to match their clothing.
Spanx valued innovation, risk-taking, and optimism across all departments, the inculcating leadership values and accountability among a employees. Furthermore, Spanx hired most of its employees through referrals from fashion, health, and beauty companies, which ensured a high level ofexpertise. By 2013. Spanx had 112 employees across all its locations, eight times more than in 2010.
SPANX'S COMPETITORS
In the shapewear product category. Spanx's several competitors had distinctive competitive advantages. Leonisa. for instance, provided flexibility to women by adjusting the level of control required. A Chery was yet another competitor in the shapewear category, which was voted most preferred shapewear in 2015 Your Contour specialized in arm-shaping shapewear. Apart from these specialty competitors, players from other apparel product categories had ventured into the ear category. including shapew Wacoal, Hanes, and Under Armour. Overall, in the hosiery sector globally (see Exhibit 2). Spanx had a market share of 2.06 per cent as of2016.
CHANGES IN THE SOCIOLOGICAL ENVIRONMENT
Both shapewear and compression wear belonged to the intimate apparel segment. According t a 2013. female body weight across the globe was increasing including in countries Euromonitor report in in Eastern Europe, Western Europe, and North America. However, fashion and beauty magazines continued to promote and idolize celebrities. focusing especially o their appearance and weight loss. Partly due to the influence of such magazines. women bought hosiery products such as shapewear. and consequently, the U.S. shapewear market reached its peak in 2010, with record sales of S850 million.
But women gradually started developing concerns about the health effects of tight clothing products such Spanx. According to doctors, products such as Spanx could lead to meralgia paresthetica (a burning sensation as a result of excessive pressure on nerves) or disease due to excessive pressure on the abdomen." The fashion world also shifted its beauty ideals. In France, excessively thin models were banned, while in the United States, Victoria's Secret launched more lingerie in plus sizes. In response to such concems, companies emerged with new clothing that addressed different concerns for example, promising reductions in cellulite or anti-aging properties, releasing sunscreen, or masking odour with fragrance. These concems negatively affected the North American shapewear market. which declined to $678 million by 2015.
Spanx was challenged not only by the intimate apparel or hosiery sector but also by other apparel sectors. While the overall apparel market in North America grew by 2 per cent in 2015. activewear (i.e.. casual clothing meant for exercise and general wear, such as yoga pants or leggings) grew by 16 per cent in 2015 Growth was mainly derived from millennials in the United States, which represented 28 per cent of the U.S population. Their increased health consciousness and informal workplace culture increased the popularity o functional but less fashionable clothing such as activewear." Moreover, activewear products also provided the benefit of a slim fit, which further enticed consumers to shift from uncomfortable, tight shapewear products to stretchable, yet slim-fitting activewear products." As customers switched to new activewear products, fewer new customers tried shapewear due to the discomfort associated with it. The attractiveness f the activewear market could be gauged from entries into this market by large sportswear companies such as Under Armour and retailers such as Walmart (see Exhibit 3)
Critics had labelled shapewear an obsolete product. For the period 2014-2022, the shapewear category was projected to grow in international markets to a value reaching S5.58 billion; however, this estimate was much lower than estimates for new product categories such as activewear. The global activewear mark was growing, on average, 5.52 per cent year-on-year and was expected to reach a value of S365 billion by 2020 (see Exhibit 4)
Nevertheless, the shapewear category found a place among a new segment of consumers. young teenagers instead of adult women. Shapewear became more popular among teenaged girls between the ages o 5 years. Wearing Spanx became so popular among teens that they wore the product for every occasion. ranging from the classroom to the sports field. Thus, wearing Spanx became a trend among teenagers to such an extent that they wore these products irrespective of their weight. Everyone, ranging from thin athletes to healthy teenage girls. began wearing Spanx and other shapewear
SPANX S RESPONSE TO CHALLENGES
Repositioning Spanx
Spanx was originally worn by women for special occasions, such as wedding or parties. When Jan Singer was the CEO of Spanx, she realized that consumer preference had been changing since 2015. and she decided to reposition Spanx from occasional wear" to "everyday wear To achieve this repositioning. Spanx launched a new Power Series line, consisting of high waisted panties and shorts. which slightly smoothed body shape while retaining the wearer's true form. These products were lightweight and more comfortable. The entire product range was repackaged and reformulated to indicate higher performance. comfort, and aesthetics. Packaging was printed with the slogan, "Reshape the way you get dressed, so you can shape the world to reflect feminist inspiration. Furthermore, to establish a stronger connection with the founder of Spanx, the Power Series packaging featured Blakely's signature. Critics, however, believed that the Spanx's repositioning efforts were incomplete because its website still promoted the theme of "the thinner, the better," even selling products such as Power Mama hosiery to accommodate pregnant women. and Spanx's traditional products, such as high-waisted shorts and body suits, remained prominent.
The repositioning efforts were company-wide: senior management restructuring also took place under Singer's regime, with the objective of increasing customer focus. To explain her restructuring effort. Singer stated, "The eye on the consumer was really missing and Spanx needed to get back into deeply understanding the consumer. Furthermore, the market research agency Kramer Group was hired as part of a rebranding effort, which helped in restructuring the Spanx store format, packaging. and even communication. The Kramer Group suggested that Spanx needed to enhance its fashion appeal, while retaining the authenticity of the brand, the new repositioning theme and of everyday wear needed to be consistent across social media, retail and digital media.
Entering the Apparel Segment
Given the potential of the activewear market. Spanx extended its product line to incorporate activewear eggings in 2014: however, online reviews indicated that Spanx was not on par with competitors in terms of sales. For instance, until September 2017. its competitor Zella had received a total of 3,905 online reviews on Nordstrom.com variants of leggings, while Spanx received a total of 617 reviews. Furthermore. none of Spanx's legging varieties received five-star ratings from consumers. in contrast to Zella, which received five-star ratings for several of its products. A whereas competitors such as Zella provided 89 legging variants. Spanx provided only 14.
In the apparel segment, Spanx also entered the denim jeans market. However, in contrast to the activewear segment, the denim industry was struggling, due to poor fit, performance, and price problems. It was market share in its core markets, Europe and North America, although the burgeoning middle-class consumers from other countries, such as India and China, supported its growth to some extent.
Seeing potential in the denim jean market, Spanx diversified into this sector in 2014. Spanx pioneered the launch of the first denim shapewear to compete an existing denim jeans. Spanx denim was different from that of its competitors: it triple-thread technology, used which involved extra stretchable yarn, hereby rendering a body-contouring fit. nvolved other patent-pending shaping features and also offered shaping waistbands for additional slimming. However, fashion critics did not seem to find Spanx s revolutionary, but viewed them as just another option in a sea of denim.
PHILANTHROPY
In 2013. Blakely joined the Giving Pledge campaign, which committed her to donating half o philanthropic endeavours." She was in fact, the first women billionaire to join the foundation led by Warren Buffet and Melinda and Bill Gates She also founded the Sara Blakely Foundation in 2006. which supported organizations such as Grameen America. Malala Fund, the Empowerment Plan, and more. Her objective was to contribute toward women's empowerment and welfare through philanthropy. and she contributed approximately S24 million to these foundations. Despite the potential competitive threat from new start-ups, she also created a platform known as the Leg Up initiative to provide telephone consultation and funding to future women entrepreneurs. Similarly, she started the Belly Art Project to make pregnancy and childbirth safe for women in need.
CHALLENGES AND THE ROAD AHEAD
Whereas 50 per cent of start-ups in the United States fail in the first five years, Blakely's Spanx was not only successful in its home country but also created an international market for her products. With 12.000 distribution outlets across 50 countries, Spanx was a brand synonymous with the shapewear product category. Spanx had a high profile and dedicated customer base, the only undergarment that received joyful shout-outs from the red carpet at award shows, Public acclamations by celebrities such as "I am triple Spanx-ed tonight!" were common.
A market leader in the shapewear category by 2016, Spanx became a S400 million private company with 00 per cent ownership by Blakely. Furthermore, although she did not intend to take the company public, she did plan to launch many new product lines, stating, "Before I retire. I want to make a comfortable high heel. I don't subscribe to the beauty is pain philosophy. She also commented. "I was inspired to move into all categories of fashion eventually because there was so much opportunity to make things more comfortable, fit better, [and] feel better. n March 2017. Spanx launched a bridal lingerie range. Although Spanx continued to innovate, several challenges did remain.
Spanx also experienced its own set of problems in-company. Former S CEO Singer, within two years of her tenure, joined the company's rival Victoria's Secret in 2017. Similar challenges arose when current employees posted negative reviews on job websites such as glassdoor.com about working with Spanx. Due to dissatisfaction, employee tumover also increased throughout 2017.
Furthermore, the glamour of shapewear was declining. As one critic commented, "The game was changed, the rules were changed, and the playing field was changed, and Spanx j didn't have the marquee brand power they had before. Although the product category was expected to grow in international markets with a value reaching S5.58 billion, it was nevertheless much lower than projected growth for new product categories such as activewear.
In the midst of these challenges, would Spanx be able to maintain its position in the market? Since 2015 Spanx had been trying to respond to challenges through rebranding or entering different core product segments, but was this strategy sustainable in the long run? As big players entered the shapewear and other apparel markets, how would Spanx withstand competition and sustain future growth?
Questions: (the answer must be simple and much easier)
1) Was it strategically appropriate for Spanx to diversify from its core product (i.e., shapewear) to unrelated products (i.e., jeans and activewear)? Is this diversification strategy likely to pay off in the long run?
2) What is the optimal growth strategy should Spanx follow to sustain its market position in the future?
In: Operations Management
I'm have trouble change JRadioButton and do not want to select all at the same time just one at a time. if one of them is unselected, then set the font as plain. Set font size as 20.
run the program and change the font and you see what I'm talking about
also this there anyway to shorten my code
import java.awt.BorderLayout;
import java.awt.Color;
import java.awt.Desktop;
import java.awt.Font;
import java.awt.event.*;
import java.net.URL;
import java.io.BufferedReader;
import java.io.BufferedWriter;
import java.io.FileReader;
import java.io.FileWriter;
import javax.swing.JCheckBox;
import javax.swing.JColorChooser;
import javax.swing.JFileChooser;
import javax.swing.JFrame;
import javax.swing.JMenu;
import javax.swing.JMenuBar;
import javax.swing.JMenuItem;
import javax.swing.JOptionPane;
import javax.swing.JRadioButton;
import javax.swing.JScrollPane;
import javax.swing.JTextArea;
import javax.swing.KeyStroke;
//MyMenuFrame will use Jframe with actionlistener
public class MyMenuFrame extends JFrame implements
ActionListener{
//creating the main menu items
JMenu menuEdit = new JMenu("Edit");
JMenu menuPrint = new JMenu("Print");
JMenu mnFile = new JMenu("File");
JMenu menuHelp = new JMenu("Help");
//creating the submenu items here because we are gonna use these
across the code
JRadioButton subMenuItem1 = new JRadioButton("Times New
Roman");
JRadioButton subMenuItem2 = new JRadioButton("Arial");
JRadioButton subMenuItem3 = new JRadioButton("Serif");
JCheckBox subMenuItem4 = new JCheckBox("Bold");
JCheckBox subMenuItem5 = new JCheckBox("Italic");
//provide scrollable view of a component
JScrollPane scrollPane;
//creating notePadArea for notepad to input the text
JTextArea notePadArea;
public MyMenuFrame() {
//setting the border layout for JFrame
this.setLayout(new BorderLayout());
// create menu bar named menuBar
JMenuBar menuBar = new JMenuBar();
this.setJMenuBar(menuBar);//adding the menubar to JFrame
// create File menu
mnFile.setMnemonic(KeyEvent.VK_F);//Alt+F
menuBar.add(mnFile);//adding the menufile
// create Open menu item
JMenuItem mntmOpen = new JMenuItem("Open");//creating the Open menu
mntmOpen.setMnemonic(KeyEvent.VK_O);//Alt+O command
mntmOpen.setActionCommand("open");//when the command equals to 'open' then the corresponding action will be performed
mntmOpen.setAccelerator(KeyStroke.getKeyStroke('O', KeyEvent.CTRL_DOWN_MASK));//respond when user clicks Ctrl+O
mntmOpen.addActionListener(this);//adding actionLister to the Menu Option Open
// create Save menu item
JMenuItem mntmSave = new JMenuItem("Save");//creating the Save menu
mntmSave.setMnemonic(KeyEvent.VK_S);//Alt+S command
mntmSave.setActionCommand("save");//when the command equals to 'save' then the corresponding action will be performed
mntmSave.setAccelerator(KeyStroke.getKeyStroke('S', KeyEvent.CTRL_DOWN_MASK));//respond when user clicks Ctrl+S
mntmSave.addActionListener(this);//adding actionLister to the Menu Option Save
// create Exit menu item
JMenuItem mntmExit = new JMenuItem("Exit");//creating the Exit menu
mntmExit.setMnemonic(KeyEvent.VK_X);//Alt+X command
mntmExit.setActionCommand("exit");//when the command equals to 'exit' then the corresponding action will be performed
mntmExit.setAccelerator(KeyStroke.getKeyStroke('X', KeyEvent.CTRL_DOWN_MASK));//respond when user clicks Ctrl+X
mntmExit.addActionListener(this);//adding actionLister to the Menu Option Exit
// add open, save and exit menu to menu-bar
mnFile.add(mntmOpen);
mnFile.addSeparator();//adding separator between open and save
mnFile.add(mntmSave);
mnFile.addSeparator();//adding separator between save and exit
mnFile.add(mntmExit);
// create Edit menu
menuEdit.setMnemonic(KeyEvent.VK_E);//creating shortcut menu when user press Alt+E
menuBar.add(menuEdit);//adding the Edit to the menubar
JMenu submenu1 = new JMenu("Color");//creating the new menu
which comes under Edit
submenu1.setMnemonic(KeyEvent.VK_C);//creating shortcut menu when
user press Alt+C
JMenuItem menuItem0 = new JMenuItem("Change Color");//creating
submenu item called change color
menuItem0.setAccelerator(KeyStroke.getKeyStroke('C',
KeyEvent.CTRL_DOWN_MASK));//it responds when user click
Ctrl+C
menuItem0.setActionCommand("color");//setting the command used to
call the correcponding action when user click this
menuItem0.addActionListener(this);//adding actionlistener
submenu1.add(menuItem0);//adding this menu item to submenu
menuEdit.add(submenu1);//adding this submenu to editmenu
menuEdit.addSeparator();//creating separator between Color and
Font
JMenu submenu = new JMenu("Font");//creating the new menu which
comes under Edit
submenu.setMnemonic(KeyEvent.VK_F);//creating shortcut menu when
user press Alt+F
subMenuItem1.setMnemonic(KeyEvent.VK_T);//creating shortcut menu
when user press Alt+T for Times New Roman
subMenuItem1.setActionCommand("times_new_roman");//setting the
command used to call the correcponding action when user click
this
subMenuItem1.addActionListener(this);//adding actionlistener
submenu.add(subMenuItem1);//adding to the submenu
subMenuItem2.setMnemonic(KeyEvent.VK_A);//creating shortcut key
Alt+A
subMenuItem2.setActionCommand("arial");//respond when the command
equals to arial
subMenuItem2.addActionListener(this);//adding action listener
submenu.add(subMenuItem2);//adding it to the submenu
subMenuItem3.setMnemonic(KeyEvent.VK_S);
subMenuItem3.setActionCommand("serif");
subMenuItem3.addActionListener(this);
submenu.add(subMenuItem3);
submenu.addSeparator();
subMenuItem4.setMnemonic(KeyEvent.VK_B);
subMenuItem4.setActionCommand("bold");
subMenuItem4.addActionListener(this);
submenu.add(subMenuItem4);
subMenuItem5.setMnemonic(KeyEvent.VK_I);
subMenuItem5.setActionCommand("italic");
subMenuItem5.addActionListener(this);
submenu.add(subMenuItem5);
menuEdit.add(submenu);
// create Print menu
menuPrint.setMnemonic(KeyEvent.VK_P);
menuBar.add(menuPrint);
JMenuItem menuItemPrint = new JMenuItem("Send To Printer");
menuItemPrint.setAccelerator(KeyStroke.getKeyStroke('P', KeyEvent.CTRL_DOWN_MASK));
menuItemPrint.setActionCommand("print");
menuItemPrint.addActionListener(this);
menuPrint.add(menuItemPrint);
// create Help menu
menuHelp.setMnemonic(KeyEvent.VK_H);
menuBar.add(menuHelp);
JMenuItem menuItemHelp = new JMenuItem("About");
menuItemHelp.setAccelerator(KeyStroke.getKeyStroke('A', KeyEvent.CTRL_DOWN_MASK));
menuItemHelp.setActionCommand("about");
menuItemHelp.addActionListener(this);
JMenuItem menuItemVisitHomePage = new JMenuItem("Visit Home Page");
menuItemVisitHomePage.setAccelerator(KeyStroke.getKeyStroke('V', KeyEvent.CTRL_DOWN_MASK));
menuItemVisitHomePage.setActionCommand("visithomepage");
menuItemVisitHomePage.addActionListener(this);
menuHelp.add(menuItemHelp);
menuHelp.addSeparator();
menuHelp.add(menuItemVisitHomePage);
notePadArea = new JTextArea();
// set no word wrap
notePadArea.setWrapStyleWord(false);
// create scrollable pane
scrollPane = new JScrollPane(notePadArea, JScrollPane.VERTICAL_SCROLLBAR_ALWAYS , JScrollPane.HORIZONTAL_SCROLLBAR_NEVER);
this.add(scrollPane,BorderLayout.CENTER);
}
@Override
public void actionPerformed(ActionEvent e) {
if(e.getActionCommand().equals("exit")) {
System.exit(0);
}else if (e.getActionCommand().equals("open")) {
JFileChooser file = new JFileChooser();
String fileName = "";//initial filename was empty
// show open file dialog
if (file.showOpenDialog(this) == JFileChooser.APPROVE_OPTION) {
fileName = file.getSelectedFile().getAbsolutePath();
} else {
return;
}
try(BufferedReader bufferedReader = new BufferedReader(new FileReader(fileName));) {
// load file content into text area
StringBuffer stringBuffer = new StringBuffer();//creating a string buffer for reading data from file
String lines = "";//for reading the lines from the selecting file
while((lines = bufferedReader.readLine() ) != null) {//it'll read untill the file ends
stringBuffer.append(lines).append("\n");//for every line read insert new line in stringBuffer
}
bufferedReader.close();//after reading of file done, the bufferedReader will be close
notePadArea.setText(stringBuffer.toString());//converting the read text to string and inserting this text into textArea
} catch (Exception error1) {//if any exception occures
System.out.println(error1.toString());//convert the expection into string and print it
}
} else if (e.getActionCommand().equals("save")) {//if the user click the save command then the file will gonna saved
JFileChooser file = new JFileChooser();//creating the file
chooser
String fileName = "";//initial file name is empty
// show open file dialog
if (file.showSaveDialog(this) == JFileChooser.APPROVE_OPTION) {//if the user select file and clicks OK button
fileName = file.getSelectedFile().getAbsolutePath();
} else {//other wise will be closed
return;
}
try(BufferedWriter bufferedWriter = new BufferedWriter(new FileWriter(fileName));) {
// write editor's content to selected file.
bufferedWriter.write(notePadArea.getText());//get the text
entered in textarea
bufferedWriter.flush();//clear the writer
} catch(Exception ex1) {}
} else if (e.getActionCommand().equals("color")) {
Color select_color = JColorChooser.showDialog(this, "Select a
color", Color.RED);
notePadArea.setForeground(select_color);
} else if (e.getActionCommand().equals("times_new_roman"))
{
if(subMenuItem1.isSelected())
notePadArea.setFont(new Font("Times New Roman", Font.PLAIN,
20));
} else if (e.getActionCommand().equals("arial")) {
if(subMenuItem2.isSelected())
notePadArea.setFont(new Font("Arial", Font.PLAIN, 20));
} else if (e.getActionCommand().equals("serif")) {
if(subMenuItem3.isSelected())
notePadArea.setFont(new Font("Serif", Font.PLAIN, 20));
} else if (e.getActionCommand().equals("bold")) {
if(subMenuItem4.isSelected()){
if(subMenuItem5.isSelected()){
notePadArea.setFont(new Font("Serif", Font.BOLD+Font.ITALIC,
12));
}else{
notePadArea.setFont(new Font("Serif", Font.BOLD, 12));
}
}else{
if(!subMenuItem5.isSelected())
notePadArea.setFont(new Font("Serif", Font.PLAIN, 12));
}
} else if (e.getActionCommand().equals("italic")) {
if(subMenuItem5.isSelected()){
if(subMenuItem4.isSelected()){
notePadArea.setFont(new Font("Serif", Font.BOLD+Font.ITALIC,
12));
}else{
notePadArea.setFont(new Font("Serif", Font.ITALIC, 12));
}
}else{
if(!subMenuItem4.isSelected())
notePadArea.setFont(new Font("Serif", Font.PLAIN, 12));
}
} else if (e.getActionCommand().equals("print")) {
int output = JOptionPane.showConfirmDialog(this, "Do you want to
print the File","Confirmation", JOptionPane.YES_NO_OPTION);
if(output==0){
JOptionPane.showMessageDialog(this, "The file is successfully
printed","Confirmation", JOptionPane.INFORMATION_MESSAGE);
}
} else if (e.getActionCommand().equals("changecolor")){
System.out.println("Color clicked");
}
else if (e.getActionCommand().equals("about")) {
JOptionPane.showMessageDialog(this, "This software is developed in 2019\nVersion is 1.0","About", JOptionPane.INFORMATION_MESSAGE);
} else if (e.getActionCommand().equals("visithomepage")) {
openWebpage("http://www.microsoft.com");
}
}
private void openWebpage (String urlString) {
try {
Desktop.getDesktop().browse(new URL(urlString).toURI());
}
catch (Exception e) {
e.printStackTrace();
}
}
}
import javax.swing.JFrame;
public class MyMenuFrameTest {
public static void main(String[] args) {
MyMenuFrame frame = new MyMenuFrame();
frame.setTitle("MyNotepad");
//for the title of the box
frame.setSize(600, 400);
//for the size of the box
frame.setDefaultCloseOperation(JFrame.EXIT_ON_CLOSE);
frame.setVisible(true);
}
}
In: Computer Science
Instruction: please summarize this entire case study in three pages. (The Bill & Melinda Gates Foundation)
The Bill & Melinda Gates Foundation Growing up in Seattle, William H. Gates III was a slender, intense boy with a messy room and a dazzling mind. At age seven or eight he read the entire World Book Encyclopedia. At his familyâs church the minister challenged young congregants to earn a free dinner by memorizing the Sermon on the Mount, a passage covering Chapters 5, 6, and 7 in the Book of Matthew. At age 11 young Bill became the only one, in 25 years of the ministerâs experience, ever to recite every word perfectly, never stumbling, never erring. 1 Yet Christianity itself never attracted Gates. Years later he would remark, âThereâs a lot more I could be doing on a Sunday morning,â an incongruous conviction for one who would become devoted to serving the poor. 2 His brilliance, however, was lasting. At private Lakeside prep school he was a prodigy, often challenging his teachers in class. Obsessed with computers in their then-primitive form, he stayed up all night writing code, a routine that would stay with him. He also read biographies of great historical figures to enter their minds and understand how they succeeded. After high school he attended Harvard University hoping to find an atmosphere of exciting erudition. Instead, he grew bored and left to pursue a fascination with computers. At age 19, Gates founded Microsoft Corporation with his Lakeside School friend Paul Allen. As its leader he was energetic, independent, and confrontational. He developed the reputation of a fanatical competitor willing to appropriate any technology and crush market rivals. He built a dominant business and by 1987, at age 31, he was a billionaire. Microsoftâs stock took flight, making more billions for Gates. However, even as he became the worldâs richest man he remained absorbed in running the corporation.
References :1 James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: HarperBusiness, 1992), pp. 6â7. 2 Garrison Keillor, âFaith at the Speed of Light,â Time, July 14, 1999, p. 25.
He put little energy into charity, thinking it could wait until he grew old. But the world expected more. Requests for good deeds and contributions poured in. Gates responded with the help of his father, who worked in a home basement office handling his sonâs donations. In 1994, Gates formalized his giving by creating the William H. Gates Foundation and endowing it with $94 million. His father agreed to manage it from the basement. Eventually, this arrangement evolved into the Bill & Melinda Gates Foundation, which included the name of his wife and was run by a professional staff from its new headquarters in Seattle. A foundation is essentially an organization with a pool of money for giving to nonprofit and charitable causes. It is not taxed if it gives out at least 5 percent of its funds each year. Bill Gates gave his foundation $16 billion in Microsoft stock in 2000. Since then he has given more. Today the Foundation is endowed with $37 billion, making it the worldâs largest. It has two parts. One part decides what projects to fund. So far, more than $25 billion has been given out. The other part manages the endowment by investing the money to make it grow. The Gateses are deeply involved in the foundationâs work, which is based on a pair of âsimple valuesâ that inspire them. One is that âall livesâno matter where they are being ledâhave equal value,â and the other is that âto whom much is given, much is expected.â Giving is tightly focused on three areasâglobal health, poverty in developing nations, and U.S. public education. Because the foundationâs endowment is unprecedentedly large, more than the gross domestic products (GDPs) of 107 countries, its goals are ambitious. One is to correct market signals that cause modern medicine to neglect diseases of the poor, thus failing to value all lives equally. Pursuing this goal, the foundation has spent more than $3.8 billion on basic vaccinations for newborns in countries with low GDPs, preventing so far an estimated 3.4 million deaths. 3 It purchases such massive amounts of vaccines that prices fall, allowing doses for millions more children. It spends billions more to create new vaccines for tropical parasitic diseases and to fight a resurgence of polio in Africa. Bill Gates is characteristically intense, impatient, and direct in the quest to save lives. Learning that the global health staff was paying big travel grants for people to fly to meetings, he issued a curt memo about ârich people flying around to talk to other rich people.â He lectured the staff: âOur net effect should be to save years of life for well under $100, so, if we waste even $500,000, we are wasting 5,000 years of life.â
References: 4 Bill Gates at 31, already a billionaire. Source: © Ed Kashi/CORBIS. 3 Statement of Helen Evans, âState of the Worldâs Vaccines and Immunization Report 2009,â GAVI Alliance, October 31, 2009, at www.gavialliance.org. 4 Quoted in Andrew Jack, âGates Foundation: Smaller Funds, Hard Decisions,â FT.com, September 30, 2009, at www.ft.com.
In 2006 Bill Gatesâ friend Warren Buffett, chairman of Berkshire Hathaway and, at the time, the worldâs second-richest man, decided to give most of his wealth away and made a bequest of 10 million shares of Berkshire Hathaway to the Gates Foundation. He believed Bill and Melinda Gates were doing such a superior job he could do no better and, rather than manage billions of dollars of giving on his own, he left his legacy in their hands. At the time, his gift was worth $31 billion, a sum that roughly doubled the Gates endowment. It arrives in annual installments of between $1 billion and $2 billion. The Gates Foundation confronts enormous social problems. Poverty and disease defy solution. Spending large sums in poor nations is a challenge. Corruption diverts funds. Agencies lack capacity. When infant lives are saved by vaccination, more people live to seek ordinary care. Some nations struggle to provide even the most basic care due to shortages of doctors and nurses. Thus, children are saved from diphtheria only to die in large numbers from common diarrhea. 5 Improving education is another nightmare. After spending $1 billion over six years to make small high schools better, an analysis showed that attendance, graduation rates, and test scores on basic subjects were lower than at similar schools not funded by the Gates Foundation. 6 Despite its magnificence, the Gates Foundation attracts critics. It is directed by only three trusteesâBill and Melinda Gates and Warren Buffetâputting its multibilliondollar expenditures in the hands of just two families. 7 It has been called an elitist, antidemocratic institution subsidized by taxpayers (through its tax exemptions) but having no accountability to society. 8 Suspicions are raised that its grants, being so big, shape the worldâs health agenda and distort research priorities, for example, by overemphasizing vaccines for tropical diseases as opposed to other forms of treatment. 9 However, the Gateses and Warren Buffet want to extend the example set by their philanthropy. In 2009 they arranged a series of small, confidential dinners attended by fellow billionaires. Guests were asked to pledge the majority of their wealth to charity, either during their lifetime or at death, each one determining which causes to fund. Over the next year this initiative was formalized in a âGiving Pledgeâ joined by 40 billionaires. 10 Their pledges are moral commitments; they are not monitored or enforced as legal contracts. The Gateses and Buffet hope to spread the initiative to other nations. Their goal is to divert wealth from the very rich to enlarge the scope of global philanthropy for generations to come.
References :5 Laurie Garrett, âThe Challenge of Global Health,â Foreign Affairs, January/February 2007. 6 The National Institutes of High School Transformation, Evaluation of the Bill & Melinda Gates Foundationâs High School Grants Initiative: 2001â2005 Final Report (Washington, DC: American Institutes for Research, 2006), pp. 9â10. 7 Pablo Eisenberg, âThe Gates-Buffett Merger Isnât Good for Philanthropy,â Chronicle of Philanthropy, July 20, 2006, p. 33. 8 âPhilanthropic World Voices Mixed Reaction on Buffettâs Gift to Gates Fund,â Chronicle of Philanthropy, July 20, 2006, p. 12, comment of Rick Cohen. 9 David McCoy, et al., âThe Bill & Melinda Gates Foundationâs Grant-Making Programme for Global Health,â The Lancet, May 9, 2009, p. 1652. 10 Carol J. Loomis, âThe $600 Billion Challenge,â Fortune, July 5, 2010.
Philanthropy is one method for converting wealth to social value. Bill Gates and Warren Buffet follow a long tradition of rich capitalists who make fortunes, then later in life spend their wealth on works of kindness. In this chapter we will expand on the subject of philanthropy. First, however, we look at how managers implement social responsibility efforts within their firms. Social responsibility, like any other corporate goal, must be systematically planned, organized, and carried out. We will set forth a model of how this can be done
In: Economics
Flight Plan Consulting, Inc.
Cost of Capital and Firm Valuation Project
The Company background
Bill Gibson began Flight Plan Consulting, Inc. (FPC) in 1990. The company offered very specialized consulting services to corporate flight departments, i.e., to those companies that have their own planes for purposes of executive transportation. This consultancy focused on the cost versus benefit considerations of the acquisition and use of corporate aircraft. Bill Gibson was ideally suited for this line of work; he was both a commercial pilot and had held an adjunct position as a finance professor in a university near his home. His company had its first and only public offering of stock in 1995; at that time revenue had reached $5 million, and the employee headcount was up to ten. In the twelve years since the company's inception, sales, earnings and the company's fine reputation have increased steadily. The company's financial information, and selected capital market and industry data and information are provided in Table 1.
A major contributor to the company's good fortunes is a particular area of concern taking place in many corporate flight departments around the United States. This concern is known as âfractional ownershipâ versus full ownership of corporate aircraft. Gibson, while not a corporate pilot, understood well the costs, benefits, concerns and industry dynamics of corporate flight departments and the companies that supplied the aircraft. This knowledge and breadth of understanding formed the basis for his consulting company.
Fractional ownership, in its simplest terms, is when several companies, usually three or four, share the ownership of a corporate aircraft. For example, a company that wishes to buy fractional ownership will buy or lease a 1/5 interest in an airplane. Such an arrangement would allow for approximately 160 hours per year of usage. The total cost would depend upon the type of aircraft chosen. The fractional purchaser or lessee would also have access to aircraft crew, maintenance and everything else needed to complete the operation of a corporate aircraft.
The interest in fractional ownership has several origins, the most prominent of which is the corporate âdownsizingâ and ârightsizingâ of the decade of the 1990's. The closing of a corporate flight department could possibly mean a significant reduction in total corporate overhead expenses. Moreover, fractional ownership may be more âflexibleâ in the manner in which the services are customized for each individual fractional owner. A rule of thumb among consultants was if the aircraft will be needed between 100 and 350 hours per year, fractional ownership would likely be the best option. [1]
Within that environment, FPC has become a major source of consulting services for firms that are moving from having an in-house flight department to fractional ownership, or are considering corporate aircraft acquisition for the first time. The operations of FPC involved Gibson or one of his five consultants working with the client to determine the most efficient manner in which to acquire the use of a corporate aircraft. The consulting relationships were always quite involved and of long duration. A consultant's reputation, however, depended upon the word-of-mouth goodwill of each client.
In the last year or so, Gibson had considered expanding by acquisition. There were several smaller consultancies in the same line of business as FPC. Gibson, after extensive discussions with his investment bank, had decided to focus upon two firms. Either one of those two would permit him immediately to acquire clients in Canada or Germany. The more pronounced international reach was exactly what FPC's strategic plan called for. While the company had done business in both Canada and parts of Western Europe for several years, the companies being considered for acquisition had very positive reputations in their respective locations.
Cost of Capital
Gibson believed that long-term capital from external sources would be needed to finance the acquisition. He believed FPC's common stock to be valued fairly at present. He also believed that the company's excellent bond rating would make a debt issue feasible.
Although the companyâs board of directors was made up of successful and knowledgeable people from a variety of backgrounds, not all of them were intimately familiar with finance; it was, therefore, essential to answer any questions they had with authority. The firmâs investment in any asset, including other companies, was a result of the strategic plan, which the board had helped to develop and had certainly approved. The cost of capital issue was a very necessary tool in the implementation of that plan. The economic worth of any investment made by FPC would be measured against the firmâs cost of money, its opportunity cost, its cost of capital; terms that Gibson knew were interchangeable. At this crucial stage of the companyâs development, he wanted his board to be âconversationalâ with those terms.
Gibson decided that he had better provide some specific and detailed information to his board concerning the company's cost of capital and its relation to the valuation process. In order to move the process along, Gibson decided to hand over the task of preparing a draft of âCost of Capital and Acquisition Plans Memoâ, as it had come to be called, to Kay Biddle. Biddle was a summer intern employed in FPC's controller's office. She was an MBA student and planned to graduate at the end of the fall semester with a concentration in finance. To construct her memo Biddle wondered how she, in relatively few words, could best show the interrelationship among the firmâs capital structure, the yield on the firmâs debt, and the rate of return on the firmâs equity. All of that information would be a starting point for her explanation.
Acquisition Plans
The board, Gibson believed, also needed to consider the effect of the impending acquisition upon the firmâs sales and net income after-tax. The purpose of the acquisition is to increase sales and income and to diversify the firm in terms of its geographic market. That is a key element in the long-term success of specialized consulting firms in FPCâs line of business.
FPC identified two possible target companies to acquire:
Maple Aviation, a fast-growing company with clients in major Canadian cities, such as Vancouver, Toronto, and Montreal.
Das Flugzeug, an established consulting company providing services to clients in Berlin, Frankfurt, and Munich.
Gibson asked Biddle to calculate the firm values of the above-mentioned targets and include the details in the memorandum. FPC's financial staff had spent considerable time analyzing the target companiesâ current and historical financial statements. The analysis helped to determine the level of free cash flows after possible acquisition. The future expected free cash flows are the net cash flows available to the firm's investors after all investment in fixed assets and working capital have been made. The expected free cash flows from Maple Aviation and Das Flugzeug are listed in Table 2 and Table 3, respectively. All values are in US dollars. The last step of firm value calculation is to discount the cash flows at the weighted average cost of capital. The valuation process would help FPC justify the fair costs to acquire the target companies.
Table 1: Selected Firm, Industry, and Capital Market Data
|
FPC, Inc. issued 10-year $1,000-par bonds five years ago. They carried a coupon rate of 6%. The coupons were paid annually. Currently the bond is selling for $883.40. The firmâs stock price has risen to $21.50 recently. It was $10 when issued. The firmâs return on equity (ROE) is 20%, and its dividend payout ratio is 40%. It just paid $1 annual dividend recently. The dividend is expected to grow at a constant rate. Assume the firm is in the 30% (combined) tax bracket. Many specialized consulting firms have a long-term debt to total asset ratio of approximately 40 percent on average. It is considered to be the optimal debt to value ratio. |
Table 2: Free Cash Flows (Thousands of US Dollars) of Maple Aviation
|
Year |
1 |
2 |
3 |
4 and thereafter |
|
Free Cash Flows ('000s of US$) |
320.00 |
400.00 |
480.00 |
Grow at a constant rate of 6% |
Table 3: Free Cash Flows (Thousands of Euros) of Das Flugzeug
|
Year |
1 |
2 |
3 and thereafter |
|
Free Cash Flow ('000s of US$) |
550.00 |
720.00 |
910.00 each year indefinitely |
Your task:
Suppose you are Kay Biddle and you will prepare the memorandum. You have to structure your memorandum around the following items:
Describe the company's core business and the market it serves.
Discuss the role of a corporate board of directors. To whom is the board responsible?
Why are capital market data and information useful when a firm is considering its cost of capital?
Calculate and present FPC's weighted average cost of capital.
Calculate and present the valuation of the two target companies to acquire.
Quantitatively discuss the comparison of the two targets.
In general, describe the effect upon the cost of capital of changes in capital market conditions such as an increase in interest rates, or a decline in stock prices.
Discuss how various factors may affect the cash flow estimates and FPC's project evaluation.
Note:
The format of the report is memorandum addressing to the board of directors. The body of your memorandum must not exceed 6 single-sided letter-size pages of typed 12-point-font double-spaced characters. You may include tables and figures in an appendix and reference them in the body of the report. If you make any assumptions or use information from external sources, state or cite them clearly. Writing and analysis should be performed by each student individually.
[1] The other options are, for less than 100 hours per year, use a charter service; for usage over 350 hours per year, operate an in-house flight department.
In: Accounting
Your firm is the incumbent auditor on Biotech Ltd, a pharmaceutical company. Since the previous audit, the company has listed on the Australian Securities Exchange which means the company has to meet additional reporting regulations. Due to rapid growth, Biotech Ltd is financially stretched and its accounting systems are struggling to cope with the growth in the business. You recently read an article in the Australian Financial Review, which stated that Biotech Ltd is currently under investigation by the Australian Taxation Office (ATO) for alleged failure to pay the appropriate amount of Pay As You Go (PAYG) tax on their payroll.
Biotech Ltd is a pharmaceutical company, developing drugs to be licensed for use around the world. Products include medicines such as tablets, medical gels and creams. The market is very competitive, encouraging rapid product innovation. New products are continually in development and improvements are made to existing formulations. Drugs must meet very stringent regulatory requirements prior to being licensed for production and sale. You are aware that during the 2020 financial year, Biotech Ltd lost several customer contracts to overseas competitors.
Biotech Ltd approached its bank during the year to extend its borrowing facilities. An extension of $20 million was sought to its existing loan to support the on-going development of new drugs. The long-term borrowings are subject to debt covenants in which the company must maintain a current ratio of 3.5:1.
In addition, the company asked the bank to make cash of $5 million available if an existing court case against the company is successful. The court case is being brought by an individual who suffered severe side effects when participating in a clinical trial in 2016.
On 8 June 2020, the Company announced to the market it had been the victim of a cyber-security incident that resulted in supplier and customer details being disclosed on the dark web. The Company is assessing the costs of the incident and the subsequent reduction in revenue. The Company expects this to have a material impact on future earnings.
Minutes from the Audit Planning meeting with Simon Jones (Finance Director of Biotech Ltd) held on 30th April 2020:
Due to the current government restrictions, the planning meeting with Simon Jones was held via Zoom. In attendance at the meeting was the Audit Partner (Michael), the Audit Manager (Amanda) and the Audit Senior (David).
The following key items were discussed during the meeting:
The Audit Team
The audit team consists of 4 people. The partner is Michael. He has been the audit partner on the Biotech Ltd audit for 6 years. The audit manager is Amanda. This is Amandaâs first time on the Biotech Ltd audit. David is the audit senior and is responsible for the initial audit planning. David has recently completed the Graduate Diploma of Chartered Accounting. David has just been offered a well-paying accountant position at Biotech but he has not yet decided whether to accept the position. The graduate on the audit is Audrey. Audreyâs friend is the receptionist at Biotech Ltd. The receptionist has no accounting knowledge and has no involvement with the recording or processing of accounting transactions.
Accounts Receivable / Sales Accounting Cycle and Internal Control System
At the end of each month, the sales manager determines the amount of products required to meet sales demand for the following month based on sales orders received. He reviews the sales orders received from customers and then prepares the pre-numbered inventory requisition forms, which he then sends to the warehouse managers so that they can prepare the goods for delivery. One copy of the sales order and inventory requisition form is sent to the warehouse, one copy is sent to the accounts receivable department and one copy is filed in the sales department.
The warehouse prepares the goods for delivery to the customers and generates the delivery document. When the goods have been delivered, the signed delivery document, which includes the delivery details, is forwarded to the accounts receivable department. The other copy is filed in the warehouse. The accounts receivable clerk matches the signed delivery document with the sales order and inventory requisition form. Once satisfied that all of the details agree, the clerk generates the sales invoice. Once generated, the clerk does another check to ensure that all details per the sales invoice agrees to the delivery document and sales order. Once satisfied, she writes âcheckedâ on the sales invoice and sends it to the customer. At the end of every week, a different clerk in the Accounts Receivable team reviews the bank statements for receipt of payments from customers and performs a reconciliation against the sales invoices. Once a customer has paid the sales invoice, the clerk stamps âreceivedâ on the sales invoice and files that along with all the other documents in date order.
The walk-through of the accounts receivable/sales cycle confirmed that the accounting and internal control system was working as documented above.
Test of control:
As part of the audit, Audrey tested the controls over the accounts receivable system. She selected a sample of twenty sales transactions and tested the control that all details had been checked. Out of the 20 sales transactions that were selected for testing, 5 sales invoices in the sample did not have the word âcheckedâ written on them. When documenting the results of the test performed, Audrey concluded that the internal control did not operate effectively and consistently throughout the year but that no further audit work is required.
Substantive test
In order to test the occurrence of the sales transactions, Audrey selected a sample of sales invoices and traced them to the General Ledger to test that they were properly recorded.
Subsequent events not previously mentioned
Misstatements identified
|
Description |
Amount |
Management Action |
|
Biotech Ltd has also been involved in a court case with a former employee since early 2018, who is suing for unfair dismissal. To date, the audit evidence that we have obtained is a verbal confirmation from Biotech Ltdâs management that they have received a claim of $250,000 against them. Biotech Ltdâs legal adviser believes it is probable that the company will be found guilty and will have to pay the amount. The amount of $250,000 is material. The $250,000 has not been recognised as a provision in the financial statements for the year ended 30 June 2020. |
$250,000 |
Management disagreed with the advice from the legal adviser. As such, they have not corrected the accounts in the final Financial Statements. The audit team believes this amount should be recorded in the financial statements at 30 June 2020. |
|
Due to the effects of Covid-19, the audit team were unable to attend the inventory stock count of Biotech Ltd. As such, they were unable to obtain sufficient audit evidence surrounding the existence of inventory. The inventory balance in the financial statements as at 30 June 2020 is $2,345,000, which is material. |
$2,345,000 |
None required. |
What is the audit opinion for the above case study?
In: Accounting
Answer the following hypothesis testing questions:
1. Determine if average prices of units âwithin 5KM of the CBDâ exceed average prices of units âlocated within 5 to 10KM from the CBDâ.
2. Determine if average prices for House within 5 to 10KM of the CBD exceeds the average price of Unit within 5KM of the CBD.
3. Determine if average prices for âHouses with three bed rooms within 5 to 10KM of the CBDâ exceeds the average price of âUnits within 5KM of the CBDâ.
4. Test the difference between population means of houses of the following groups: prices for âOne bedroomâ, âTwo bedroomsâ and âThree bedrooms (or more)â properties.
5. Test the difference between population means of units of the following groups: prices for âOne bathroomâ, âTwo bathroomsâ, âThree bathrooms (or more)â properties.
Show your tested hypotheses for each questions, decision rules and then provide both statistical and managerial conclusions for each part. Then, provide an overall conclusion. Be clear in the conclusion that you draw from your analysis, and provide useful suggestions to the companyâs CEO. Conclusions must be based on the findings of your analysis only.
Notes:
- Use critical value approach
- Use 0.05 level of significance in your analyses, and assume we have normal distributions and unequal variances of populations.
- Use Excel to conduct your analysis and hypothesis testing.
- Each question requires an Excel output. Simply copy your outputs from Excel sheets and paste them into the Word file of your Business Report.
| PRICE (in 10,000 AU Dollars) | TYPE | PROXIMITY | BEDROOM | BATHROOM |
| 310 | 1 | 1 | 2 | 1 |
| 307 | 1 | 1 | 2 | 1 |
| 305 | 1 | 1 | 2 | 1 |
| 300 | 1 | 1 | 2 | 1 |
| 290 | 1 | 1 | 2 | 1 |
| 287 | 1 | 1 | 2 | 1 |
| 280 | 1 | 1 | 1 | 1 |
| 279 | 1 | 1 | 1 | 1 |
| 278 | 1 | 1 | 1 | 1 |
| 277 | 1 | 1 | 1 | 1 |
| 277 | 1 | 1 | 2 | 1 |
| 276 | 1 | 1 | 2 | 1 |
| 269 | 1 | 1 | 2 | 1 |
| 268 | 1 | 1 | 1 | 1 |
| 267 | 1 | 1 | 1 | 1 |
| 267 | 1 | 1 | 1 | 1 |
| 266 | 1 | 1 | 1 | 1 |
| 265 | 1 | 1 | 2 | 1 |
| 257 | 1 | 1 | 1 | 1 |
| 256 | 1 | 1 | 3 | 1 |
| 252 | 1 | 1 | 3 | 1 |
| 250 | 1 | 1 | 1 | 1 |
| 249 | 1 | 1 | 2 | 1 |
| 247 | 1 | 1 | 1 | 1 |
| 247 | 1 | 1 | 1 | 1 |
| 247 | 1 | 1 | 2 | 1 |
| 245 | 1 | 1 | 1 | 1 |
| 244 | 1 | 1 | 1 | 1 |
| 243 | 1 | 1 | 3 | 1 |
| 240 | 1 | 1 | 3 | 1 |
| 235 | 1 | 1 | 3 | 1 |
| 230 | 1 | 1 | 1 | 1 |
| 223 | 1 | 1 | 3 | 1 |
| 217 | 1 | 1 | 1 | 1 |
| 213 | 1 | 1 | 3 | 1 |
| 209 | 1 | 1 | 3 | 1 |
| 208 | 1 | 1 | 2 | 1 |
| 207 | 1 | 1 | 2 | 1 |
| 207 | 1 | 1 | 2 | 1 |
| 207 | 1 | 1 | 2 | 1 |
| 205 | 1 | 1 | 2 | 1 |
| 202 | 1 | 1 | 3 | 1 |
| 201 | 1 | 1 | 2 | 1 |
| 199 | 1 | 1 | 3 | 1 |
| 190 | 1 | 1 | 2 | 2 |
| 189 | 1 | 2 | 2 | 1 |
| 188 | 1 | 1 | 2 | 2 |
| 188 | 1 | 1 | 1 | 2 |
| 186 | 1 | 1 | 1 | 2 |
| 185 | 1 | 2 | 2 | 1 |
| 183 | 1 | 1 | 3 | 1 |
| 181 | 1 | 1 | 3 | 1 |
| 179 | 1 | 2 | 2 | 2 |
| 177 | 1 | 2 | 2 | 2 |
| 173 | 1 | 1 | 3 | 1 |
| 171 | 1 | 1 | 3 | 1 |
| 164 | 1 | 1 | 2 | 2 |
| 163 | 1 | 1 | 3 | 1 |
| 159 | 1 | 1 | 2 | 2 |
| 145 | 1 | 1 | 1 | 2 |
| 144 | 1 | 1 | 3 | 1 |
| 143 | 1 | 1 | 3 | 1 |
| 143 | 1 | 1 | 1 | 2 |
| 140 | 1 | 1 | 1 | 2 |
| 139 | 1 | 1 | 1 | 2 |
| 133 | 1 | 1 | 2 | 2 |
| 132 | 1 | 1 | 2 | 2 |
| 130 | 1 | 1 | 3 | 1 |
| 120 | 1 | 2 | 3 | 2 |
| 119 | 1 | 2 | 3 | 2 |
| 118 | 1 | 2 | 2 | 2 |
| 117 | 1 | 2 | 2 | 2 |
| 115 | 1 | 1 | 1 | 2 |
| 112 | 1 | 1 | 1 | 2 |
| 111 | 1 | 2 | 2 | 2 |
| 104 | 1 | 2 | 2 | 2 |
| 85 | 1 | 1 | 2 | 2 |
| 83 | 1 | 1 | 2 | 2 |
| 77 | 1 | 2 | 3 | 3 |
| 74 | 1 | 2 | 3 | 3 |
| 74 | 1 | 1 | 2 | 2 |
| 73 | 1 | 1 | 2 | 2 |
| 72 | 1 | 2 | 1 | 3 |
| 71 | 1 | 1 | 1 | 3 |
| 69 | 1 | 1 | 1 | 3 |
| 69 | 1 | 2 | 1 | 3 |
| 29 | 1 | 2 | 1 | 3 |
| 27 | 1 | 2 | 1 | 3 |
| 199 | 2 | 2 | 3 | 1 |
| 193 | 2 | 2 | 3 | 1 |
| 186 | 2 | 2 | 2 | 1 |
| 185 | 2 | 2 | 2 | 1 |
| 184 | 2 | 2 | 3 | 1 |
| 183 | 2 | 2 | 2 | 1 |
| 183 | 2 | 2 | 3 | 1 |
| 182 | 2 | 2 | 2 | 1 |
| 177 | 2 | 2 | 3 | 1 |
| 175 | 2 | 2 | 3 | 1 |
| 163 | 2 | 1 | 1 | 2 |
| 162 | 2 | 1 | 1 | 2 |
| 161 | 2 | 2 | 2 | 2 |
| 159 | 2 | 2 | 2 | 2 |
| 159 | 2 | 2 | 2 | 2 |
| 157 | 2 | 2 | 2 | 2 |
| 156 | 2 | 2 | 3 | 1 |
| 155 | 2 | 2 | 3 | 1 |
| 141 | 2 | 1 | 2 | 2 |
| 139 | 2 | 1 | 2 | 2 |
| 138 | 2 | 2 | 2 | 2 |
| 137 | 2 | 2 | 1 | 2 |
| 135 | 2 | 2 | 2 | 2 |
| 133 | 2 | 2 | 1 | 2 |
| 129 | 2 | 1 | 3 | 3 |
| 126 | 2 | 1 | 3 | 3 |
| 125 | 2 | 1 | 1 | 2 |
| 124 | 2 | 1 | 1 | 2 |
| 123 | 2 | 2 | 1 | 2 |
| 122 | 2 | 2 | 1 | 2 |
| 119 | 2 | 1 | 3 | 2 |
| 117 | 2 | 1 | 3 | 2 |
| 116 | 2 | 2 | 2 | 3 |
| 111 | 2 | 2 | 2 | 3 |
| 106 | 2 | 1 | 1 | 3 |
| 104 | 2 | 1 | 1 | 3 |
| 99 | 2 | 2 | 2 | 2 |
| 97 | 2 | 2 | 2 | 2 |
| 89 | 2 | 1 | 2 | 2 |
| 87 | 2 | 1 | 2 | 2 |
| 79 | 2 | 1 | 2 | 3 |
| 75 | 2 | 1 | 2 | 3 |
| 71 | 2 | 2 | 3 | 2 |
| 70 | 2 | 2 | 2 | 2 |
| 69 | 2 | 2 | 2 | 2 |
| 69 | 2 | 2 | 3 | 2 |
| 69 | 2 | 1 | 2 | 3 |
| 69 | 2 | 2 | 3 | 3 |
| 68 | 2 | 1 | 2 | 3 |
| 68 | 2 | 1 | 1 | 3 |
| 67 | 2 | 1 | 3 | 3 |
| 66 | 2 | 1 | 3 | 3 |
| 66 | 2 | 2 | 3 | 3 |
| 65 | 2 | 1 | 1 | 3 |
| 65 | 2 | 1 | 2 | 3 |
| 65 | 2 | 1 | 2 | 3 |
| 65 | 2 | 2 | 2 | 3 |
| 64 | 2 | 1 | 2 | 3 |
| 64 | 2 | 2 | 2 | 3 |
| 63 | 2 | 1 | 2 | 3 |
| 60 | 2 | 2 | 2 | 2 |
| 59 | 2 | 1 | 2 | 3 |
| 58 | 2 | 1 | 2 | 3 |
| 57 | 2 | 2 | 2 | 2 |
| 56 | 2 | 1 | 2 | 3 |
| 55 | 2 | 1 | 2 | 3 |
| 55 | 2 | 1 | 2 | 3 |
| 55 | 2 | 1 | 2 | 3 |
| 55 | 2 | 1 | 1 | 3 |
| 54 | 2 | 1 | 1 | 3 |
| 53 | 2 | 1 | 2 | 3 |
| 52 | 2 | 1 | 3 | 3 |
| 51 | 2 | 1 | 1 | 3 |
| 51 | 2 | 1 | 1 | 3 |
| 51 | 2 | 1 | 2 | 3 |
| 51 | 2 | 1 | 3 | 3 |
| 50 | 2 | 1 | 2 | 3 |
| 49 | 2 | 1 | 2 | 3 |
| 48 | 2 | 1 | 3 | 3 |
| 48 | 2 | 1 | 2 | 3 |
| 46 | 2 | 1 | 3 | 3 |
| 45 | 2 | 1 | 2 | 3 |
| 45 | 2 | 1 | 1 | 3 |
| 45 | 2 | 1 | 2 | 3 |
| 44 | 2 | 1 | 2 | 3 |
| 43 | 2 | 1 | 1 | 3 |
| 43 | 2 | 1 | 2 | 3 |
| 43 | 2 | 1 | 2 | 3 |
| 41 | 2 | 1 | 2 | 3 |
| 41 | 2 | 1 | 2 | 3 |
| 40 | 2 | 1 | 3 | 2 |
| 40 | 2 | 1 | 3 | 3 |
| 39 | 2 | 1 | 3 | 2 |
| 39 | 2 | 1 | 3 | 3 |
| 39 | 2 | 1 | 3 | 3 |
| 38 | 2 | 1 | 3 | 3 |
| 38 | 2 | 2 | 2 | 3 |
| 36 | 2 | 2 | 2 | 3 |
| 36 | 2 | 1 | 3 | 3 |
| 34 | 2 | 1 | 3 | 3 |
| 31 | 2 | 2 | 1 | 3 |
| 29 | 2 | 2 | 1 | 3 |
In: Statistics and Probability
Biotech Limited
Financial year end 30 June 2020
You are an auditor in Smit & Chandra, a mid-tier audit firm. Your firm is the incumbent auditor on Biotech Ltd, a pharmaceutical company. Since the previous audit, the company has listed on the Australian Securities Exchange which means the company has to meet additional reporting regulations. Due to rapid growth, Biotech Ltd is financially stretched and its accounting systems are struggling to cope with the growth in the business. You recently read an article in the Australian Financial Review, which stated that Biotech Ltd is currently under investigation by the Australian Taxation Office (ATO) for alleged failure to pay the appropriate amount of Pay As You Go (PAYG) tax on their payroll.
Biotech Ltd is a pharmaceutical company, developing drugs to be licensed for use around the world. Products include medicines such as tablets, medical gels and creams. The market is very competitive, encouraging rapid product innovation. New products are continually in development and improvements are made to existing formulations. Drugs must meet very stringent regulatory requirements prior to being licensed for production and sale. You are aware that during the 2020 financial year, Biotech Ltd lost several customer contracts to overseas competitors.
Biotech Ltd approached its bank during the year to extend its borrowing facilities. An extension of $20 million was sought to its existing loan to support the on-going development of new drugs. The long-term borrowings are subject to debt covenants in which the company must maintain a current ratio of 3.5:1.
In addition, the company asked the bank to make cash of $5 million available if an existing court case against the company is successful. The court case is being brought by an individual who suffered severe side effects when participating in a clinical trial in 2016.
On 8 June 2020, the Company announced to the market it had been the victim of a cyber-security incident that resulted in supplier and customer details being disclosed on the dark web. The Company is assessing the costs of the incident and the subsequent reduction in revenue. The Company expects this to have a material impact on future earnings.
In December 2019, the internal audit department of Biotech Ltd performed a review of the operation of controls over processing of overtime payments in the Payroll department. It was found that the companyâs specified internal control procedures in relation to the processing of overtime payments were not followed.
Below are some results of the analytical review procedures performed by the Senior Auditor (David) during the planning stage:
Sales 12.5% decrease since prior year
Net profit after tax 20% decrease since prior year
Accounts payable 15% decrease since prior year
Cash at Bank 16% increase since prior year
Accounts receivable 18% increase since prior year
Inventories 6% increase since prior year
Current ratio: 3.6:1
Debt to Equity ratio: 0.6
Minutes from the Audit Planning meeting with Simon Jones (Finance Director of Biotech Ltd) held on 30th April 2020:
Due to the current government restrictions, the planning meeting with Simon Jones was held via Zoom. In attendance at the meeting was the Audit Partner (Michael), the Audit Manager (Amanda) and the Audit Senior (David).
The following key items were discussed during the meeting:
The Audit Team
The audit team consists of 4 people. The partner is Michael. He has been the audit partner on the Biotech Ltd audit for 6 years. The audit manager is Amanda. This is Amandaâs first time on the Biotech Ltd audit. David is the audit senior and is responsible for the initial audit planning. David has recently completed the Graduate Diploma of Chartered Accounting. David has just been offered a well-paying accountant position at Biotech but he has not yet decided whether to accept the position. The graduate on the audit is Audrey. Audreyâs friend is the receptionist at Biotech Ltd. The receptionist has no accounting knowledge and has no involvement with the recording or processing of accounting transactions.
Accounts Receivable / Sales Accounting Cycle and Internal Control System
At the end of each month, the sales manager determines the amount of products required to meet sales demand for the following month based on sales orders received. He reviews the sales orders received from customers and then prepares the pre-numbered inventory requisition forms, which he then sends to the warehouse managers so that they can prepare the goods for delivery. One copy of the sales order and inventory requisition form is sent to the warehouse, one copy is sent to the accounts receivable department and one copy is filed in the sales department.
The warehouse prepares the goods for delivery to the customers and generates the delivery document. When the goods have been delivered, the signed delivery document, which includes the delivery details, is forwarded to the accounts receivable department. The other copy is filed in the warehouse. The accounts receivable clerk matches the signed delivery document with the sales order and inventory requisition form. Once satisfied that all of the details agree, the clerk generates the sales invoice. Once generated, the clerk does another check to ensure that all details per the sales invoice agrees to the delivery document and sales order. Once satisfied, she writes âcheckedâ on the sales invoice and sends it to the customer. At the end of every week, a different clerk in the Accounts Receivable team reviews the bank statements for receipt of payments from customers and performs a reconciliation against the sales invoices. Once a customer has paid the sales invoice, the clerk stamps âreceivedâ on the sales invoice and files that along with all the other documents in date order.
The walk-through of the accounts receivable/sales cycle confirmed that the accounting and internal control system was working as documented above.
Test of control:
As part of the audit, Audrey tested the controls over the accounts receivable system. She selected a sample of twenty sales transactions and tested the control that all details had been checked. Out of the 20 sales transactions that were selected for testing, 5 sales invoices in the sample did not have the word âcheckedâ written on them. When documenting the results of the test performed, Audrey concluded that the internal control did not operate effectively and consistently throughout the year but that no further audit work is required.
Substantive test
In order to test the occurrence of the sales transactions, Audrey selected a sample of sales invoices and traced them to the General Ledger to test that they were properly recorded.
Subsequent events not previously mentioned
What is the independence of the audit team?
In: Accounting
Biotech Limited
Financial year end 30 June 2020
You are an auditor in Smit & Chandra, a mid-tier audit firm. Your firm is the incumbent auditor on Biotech Ltd, a pharmaceutical company. Since the previous audit, the company has listed on the Australian Securities Exchange which means the company has to meet additional reporting regulations. Due to rapid growth, Biotech Ltd is financially stretched and its accounting systems are struggling to cope with the growth in the business. You recently read an article in the Australian Financial Review, which stated that Biotech Ltd is currently under investigation by the Australian Taxation Office (ATO) for alleged failure to pay the appropriate amount of Pay As You Go (PAYG) tax on their payroll.
Biotech Ltd is a pharmaceutical company, developing drugs to be licensed for use around the world. Products include medicines such as tablets, medical gels and creams. The market is very competitive, encouraging rapid product innovation. New products are continually in development and improvements are made to existing formulations. Drugs must meet very stringent regulatory requirements prior to being licensed for production and sale. You are aware that during the 2020 financial year, Biotech Ltd lost several customer contracts to overseas competitors.
Biotech Ltd approached its bank during the year to extend its borrowing facilities. An extension of $20 million was sought to its existing loan to support the on-going development of new drugs. The long-term borrowings are subject to debt covenants in which the company must maintain a current ratio of 3.5:1.
In addition, the company asked the bank to make cash of $5 million available if an existing court case against the company is successful. The court case is being brought by an individual who suffered severe side effects when participating in a clinical trial in 2016.
On 8 June 2020, the Company announced to the market it had been the victim of a cyber-security incident that resulted in supplier and customer details being disclosed on the dark web. The Company is assessing the costs of the incident and the subsequent reduction in revenue. The Company expects this to have a material impact on future earnings.
In December 2019, the internal audit department of Biotech Ltd performed a review of the operation of controls over processing of overtime payments in the Payroll department. It was found that the companyâs specified internal control procedures in relation to the processing of overtime payments were not followed.
Below are some results of the analytical review procedures performed by the Senior Auditor (David) during the planning stage:
Sales 12.5% decrease since prior year
Net profit after tax 20% decrease since prior year
Accounts payable 15% decrease since prior year
Cash at Bank 16% increase since prior year
Accounts receivable 18% increase since prior year
Inventories 6% increase since prior year
Current ratio: 3.6:1
Debt to Equity ratio: 0.6
Minutes from the Audit Planning meeting with Simon Jones (Finance Director of Biotech Ltd) held on 30th April 2020:
Due to the current government restrictions, the planning meeting with Simon Jones was held via Zoom. In attendance at the meeting was the Audit Partner (Michael), the Audit Manager (Amanda) and the Audit Senior (David).
The following key items were discussed during the meeting:
The Audit Team
The audit team consists of 4 people. The partner is Michael. He has been the audit partner on the Biotech Ltd audit for 6 years. The audit manager is Amanda. This is Amandaâs first time on the Biotech Ltd audit. David is the audit senior and is responsible for the initial audit planning. David has recently completed the Graduate Diploma of Chartered Accounting. David has just been offered a well-paying accountant position at Biotech but he has not yet decided whether to accept the position. The graduate on the audit is Audrey. Audreyâs friend is the receptionist at Biotech Ltd. The receptionist has no accounting knowledge and has no involvement with the recording or processing of accounting transactions.
Accounts Receivable / Sales Accounting Cycle and Internal Control System
At the end of each month, the sales manager determines the amount of products required to meet sales demand for the following month based on sales orders received. He reviews the sales orders received from customers and then prepares the pre-numbered inventory requisition forms, which he then sends to the warehouse managers so that they can prepare the goods for delivery. One copy of the sales order and inventory requisition form is sent to the warehouse, one copy is sent to the accounts receivable department and one copy is filed in the sales department.
The warehouse prepares the goods for delivery to the customers and generates the delivery document. When the goods have been delivered, the signed delivery document, which includes the delivery details, is forwarded to the accounts receivable department. The other copy is filed in the warehouse. The accounts receivable clerk matches the signed delivery document with the sales order and inventory requisition form. Once satisfied that all of the details agree, the clerk generates the sales invoice. Once generated, the clerk does another check to ensure that all details per the sales invoice agrees to the delivery document and sales order. Once satisfied, she writes âcheckedâ on the sales invoice and sends it to the customer. At the end of every week, a different clerk in the Accounts Receivable team reviews the bank statements for receipt of payments from customers and performs a reconciliation against the sales invoices. Once a customer has paid the sales invoice, the clerk stamps âreceivedâ on the sales invoice and files that along with all the other documents in date order.
The walk-through of the accounts receivable/sales cycle confirmed that the accounting and internal control system was working as documented above.
Test of control:
As part of the audit, Audrey tested the controls over the accounts receivable system. She selected a sample of twenty sales transactions and tested the control that all details had been checked. Out of the 20 sales transactions that were selected for testing, 5 sales invoices in the sample did not have the word âcheckedâ written on them. When documenting the results of the test performed, Audrey concluded that the internal control did not operate effectively and consistently throughout the year but that no further audit work is required.
Substantive test
In order to test the occurrence of the sales transactions, Audrey selected a sample of sales invoices and traced them to the General Ledger to test that they were properly recorded.
Subsequent events not previously mentioned
Identify and Explain the inherent risk and business risk and their types for the above case study?
In: Accounting
Biotech Limited
Financial year end 30 June 2020
You are an auditor in Smit & Chandra, a mid-tier audit firm. Your firm is the incumbent auditor on Biotech Ltd, a pharmaceutical company. Since the previous audit, the company has listed on the Australian Securities Exchange which means the company has to meet additional reporting regulations. Due to rapid growth, Biotech Ltd is financially stretched and its accounting systems are struggling to cope with the growth in the business. You recently read an article in the Australian Financial Review, which stated that Biotech Ltd is currently under investigation by the Australian Taxation Office (ATO) for alleged failure to pay the appropriate amount of Pay As You Go (PAYG) tax on their payroll.
Biotech Ltd is a pharmaceutical company, developing drugs to be licensed for use around the world. Products include medicines such as tablets, medical gels and creams. The market is very competitive, encouraging rapid product innovation. New products are continually in development and improvements are made to existing formulations. Drugs must meet very stringent regulatory requirements prior to being licensed for production and sale. You are aware that during the 2020 financial year, Biotech Ltd lost several customer contracts to overseas competitors.
Biotech Ltd approached its bank during the year to extend its borrowing facilities. An extension of $20 million was sought to its existing loan to support the on-going development of new drugs. The long-term borrowings are subject to debt covenants in which the company must maintain a current ratio of 3.5:1.
In addition, the company asked the bank to make cash of $5 million available if an existing court case against the company is successful. The court case is being brought by an individual who suffered severe side effects when participating in a clinical trial in 2016.
On 8 June 2020, the Company announced to the market it had been the victim of a cyber-security incident that resulted in supplier and customer details being disclosed on the dark web. The Company is assessing the costs of the incident and the subsequent reduction in revenue. The Company expects this to have a material impact on future earnings.
In December 2019, the internal audit department of Biotech Ltd performed a review of the operation of controls over processing of overtime payments in the Payroll department. It was found that the companyâs specified internal control procedures in relation to the processing of overtime payments were not followed.
Below are some results of the analytical review procedures performed by the Senior Auditor (David) during the planning stage:
Sales 12.5% decrease since prior year
Net profit after tax 20% decrease since prior year
Accounts payable 15% decrease since prior year
Cash at Bank 16% increase since prior year
Accounts receivable 18% increase since prior year
Inventories 6% increase since prior year
Current ratio: 3.6:1
Debt to Equity ratio: 0.6
Minutes from the Audit Planning meeting with Simon Jones (Finance Director of Biotech Ltd) held on 30th April 2020:
Due to the current government restrictions, the planning meeting with Simon Jones was held via Zoom. In attendance at the meeting was the Audit Partner (Michael), the Audit Manager (Amanda) and the Audit Senior (David).
The following key items were discussed during the meeting:
The Audit Team
The audit team consists of 4 people. The partner is Michael. He has been the audit partner on the Biotech Ltd audit for 6 years. The audit manager is Amanda. This is Amandaâs first time on the Biotech Ltd audit. David is the audit senior and is responsible for the initial audit planning. David has recently completed the Graduate Diploma of Chartered Accounting. David has just been offered a well-paying accountant position at Biotech but he has not yet decided whether to accept the position. The graduate on the audit is Audrey. Audreyâs friend is the receptionist at Biotech Ltd. The receptionist has no accounting knowledge and has no involvement with the recording or processing of accounting transactions.
Accounts Receivable / Sales Accounting Cycle and Internal Control System
At the end of each month, the sales manager determines the amount of products required to meet sales demand for the following month based on sales orders received. He reviews the sales orders received from customers and then prepares the pre-numbered inventory requisition forms, which he then sends to the warehouse managers so that they can prepare the goods for delivery. One copy of the sales order and inventory requisition form is sent to the warehouse, one copy is sent to the accounts receivable department and one copy is filed in the sales department.
The warehouse prepares the goods for delivery to the customers and generates the delivery document. When the goods have been delivered, the signed delivery document, which includes the delivery details, is forwarded to the accounts receivable department. The other copy is filed in the warehouse. The accounts receivable clerk matches the signed delivery document with the sales order and inventory requisition form. Once satisfied that all of the details agree, the clerk generates the sales invoice. Once generated, the clerk does another check to ensure that all details per the sales invoice agrees to the delivery document and sales order. Once satisfied, she writes âcheckedâ on the sales invoice and sends it to the customer. At the end of every week, a different clerk in the Accounts Receivable team reviews the bank statements for receipt of payments from customers and performs a reconciliation against the sales invoices. Once a customer has paid the sales invoice, the clerk stamps âreceivedâ on the sales invoice and files that along with all the other documents in date order.
The walk-through of the accounts receivable/sales cycle confirmed that the accounting and internal control system was working as documented above.
Test of control:
As part of the audit, Audrey tested the controls over the accounts receivable system. She selected a sample of twenty sales transactions and tested the control that all details had been checked. Out of the 20 sales transactions that were selected for testing, 5 sales invoices in the sample did not have the word âcheckedâ written on them. When documenting the results of the test performed, Audrey concluded that the internal control did not operate effectively and consistently throughout the year but that no further audit work is required.
Substantive test
In order to test the occurrence of the sales transactions, Audrey selected a sample of sales invoices and traced them to the General Ledger to test that they were properly recorded.
Subsequent events not previously mentioned
Write about the internal control system and the assertion for the same?
In: Accounting