SawPro Company, owned and operated by Heather Moore, opened for business in 2015. The company sells a single model of commercial grade chain saws that it purchases from the manufacturer. Heather’s customers, primarily businesses offering landscaping and tree-services, purchase saws on account, with payment typically due within thirty-days.  

The following transactions occurred during the calendar year ending December 31, 2018:

1. Acquired equipment that automated sharpening chain saw blades. Instead of paying cash, Heather signed an agreement with a lease financing company. The equipment was delivered, installed, and ready for service on March 1, 2018. Terms of the lease require twenty-four equal monthly payments of $270, with the first payment due at signing on March 1st. The annual rate is 4.75 percent. Heather made all payments on the dates required. The fair value of the equipment is $6,500 with an expected service life of thirty months. Heather has the option to purchase the equipment for $250 at the end of the lease term; she expects to exercise that option. (Note: use the old rule percent’s to determine whether the lease is financing or operating).

Post a journal entry of this transaction!

Siemens’ Simple Structure–Not

There is perhaps no tougher task for an executive than to restructure a European organization. Ask former Siemens CEO Klaus Kleinfeld.

Siemens, with 77 billion Euros in revenue in 2008, some 427,000 employees, and branches in 190 countries, is one of the largest electronics companies in the world. Although the company has long been respected for its engineering prowess, it’s also derided for its sluggishness and mechanistic structure. So when Kleinfeld took over as CEO, he sought to restructure the company along the lines of what Jack Welch did at General Electric. He has tried to make the structure less bureaucratic so decisions are made more quickly. He spun off underperforming businesses. And he simplified the company’s structure.

Kleinfeld’s efforts drew angry protests from employee groups, with constant picket lines outside his corporate offices. One of the challenges of transforming European organizations is the customary active participation of employees in executive decisions. Half the seats on the Seimens board of directors are allocated to labor representatives. Not surprisingly, the labor groups did not react positively to Kleinfeld’s GE-like restructuring efforts. In his efforts to speed those efforts, labor groups alleged, Kleinfeld secretly bankrolled a business-friendly workers’ group to try to undermine Germany’s main industrial union.

Due to this and other allegations, Kleinfeld was forced out in June 2007 and replaced by Peter Löscher. Löscher has found the same tensions between inertia and the need for restructuring. Only a month after becoming CEO, Löscher was faced with a decision whether to spin off the firm’s underperforming 10 billion-Euro auto parts unit, VDO. He had to weigh the forces for stability, which want to protect worker interests, against U.S.-style pressures for financial performance. One of VDO’s possible buyers is a U.S. company, TRW, the controlling interest of which is held by Blackstone, a U.S. private equity firm. German labor representatives have derided such private equity firms as “locusts.” When Löscher decided to sell VDO to German tire giant Continental Corporation, Continental promptly began to downsize and restructure the unit’s operations.

Löscher has continued to restructure Siemens. In mid- 2008, he announced elimination of nearly 17,000 jobs worldwide. He also announced plans to consolidate more business units and reorganize the company’s operations geographically. “The speed at which business is changing worldwide has increased considerably, and we’re orienting Siemens accordingly,” Löscher said.

Since the switch from Kleinfeld to Löscher, Siemens has experienced its ups and downs. Since 2008, its stock price has fallen 26 percent on the European stock exchange and is down 31 percent on the New York Stock Exchange. That is better than some competitors, such as France’s Alcatel-Lucent (down 83 percent) and General Electric (down 69 percent), and worse than others, such as IBM (up 8 percent) and the Swiss/Swedish conglomerate ABB (down 15 percent).

Though Löscher’s restructuring efforts have generated far less controversy than Kleinfeld’s, that doesn’t mean they went over well with all constituents. Of the 2008 job cuts, Werner Neugebauer, regional director for a union representing many Siemens employees, said, “The planned job cuts are incomprehensible nor acceptable for these reasons, and in this extent, completely exaggerated.”

When asked by a reporter whether the cuts would be controversial, Löscher retorted, “I couldn’t care less how it’s portrayed.” He paused a moment, then added, ““Maybe that’s the wrong term. I do care.”

Questions. ANSWERS SHOULD BE 1500 WORDS

1. What do Kleinfeld’s efforts at Siemens tell you about the difficulties of restructuring organizations?
2. Why do you think Löscher’s restructuring decisions have generated less controversy than did Kleinfeld’s?
3. Assume a colleague read this case and concluded “This case proves restructuring efforts do not improve a company’s financial performance.” How would you respond to this statement?
4. Do you think a CEO who decides to restructure or downsize a company takes the well-being of employees into account? Should he or she do so? Why or why not?

CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS, INC.

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.

The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2017 and 2018.

2. A balance sheet for 2017 and 2018.

3. Operating cash flow for each year.

4. Cash flow from assets for 2018.

5. Cash flow to creditors for 2018.

6. Cash flow to stockholders for 2018.

7. What are the limitations of financial statements?

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.

The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40 percent of net income as dividends to Tad and the other original investors, and it has a 21 percent tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2017 and 2018.

2. A balance sheet for 2017 and 2018. (HINT: remember than both sides must balance...force equity to be what it needs to be in order to make this happen...it is the "plug" variable.)

3. Operating cash flow for each year.

4. Cash flow from assets for 2018.

5. Cash flow to creditors for 2018.

6. Cash flow to stockholders for 2018.

Facts:

A Big Company (ABC) is one of several corporations owned entirely by XYZ corporation. XYZ is publicly traded on a stock exchange. ABC makes an over-the-counter vitamin pill that has been very popular for many years.

ABC engaged the services of a marketing firm, SellALot, LLC, to market this diet pill. Mr. Bragger, the member of the LLC with whom the CEO of ABC directly dealt, had previously told many of SellALot’s clients that he worked for ABC. SellALot was the exclusive distributor for this vitamin pill in the US. Mr. Bragger is also a member of the Board of Directors of XYZ. SellALot has 4 other members of this LLC.

The CEO of ABC, Mr.Successful, was also on the board of XYZ. He and his partner, Counts Fingers (who was also Mr. Successful’s CPA) owned approximately 25% of the outstanding stock of XYZ. The general partnership was known as S and C Partnership (a limited partnership with Mr. Bragger as the only limited partner and the partner who provided the funds to buy the stock from Mr. Successful and Counts Fingers) actually owned this stock after Mr. Successful and Counts Fingers transferred the stock to the partnership.

Counts Fingers is also the Chief Financial Officer for Mega Bucks Bank which made the loan to Mr. Bragger- he used those loan proceeds to contribute to the S and C Partnership to buy the XYZ stock from Mr. Successful and Counts Fingers. Mr. Bragger is a member of the Board of Directors of Mega Bucks Bank.

ABC’s vitamin pill has recently been the subject of much attention and litigation. The pill has apparently caused many health problems with those who have taken it for more than a couple of weeks. Over 1,000 of those who took the pill for more than 4 weeks at a time have had heart valve replacement surgery and it appears that this surgery was necessitated by the vitamin pill which ABC makes. There is a class action lawsuit with more than one million class members who have been harmed in some fashion by this vitamin pill. The class action lawsuit filings have demanded 5 billion dollars in damages for all of these litigants.

XYZ is currently considering selling ABC to an investor (Private Equity, LLC.). You have been hired to determine how much money ABC might be worth and to assess the litigation exposure of ABC for this vitamin pill made by ABC.

Questions:

1. Describe the agency relationships of the business organizations and the individuals named in this fact situation and describe the duties of each to the other. (You only have to describe the duties once and then you can refer to this list with all of the other agency relationships you discuss) If the parties could be in more than one agency relationship, the be sure to include all of the possibilities in your response.

2. Explain the legal theory that would make XYZ liable for the ABC lawsuit.

   Would there be any viable defense to this liability claim against XYZ?

3. Describe and explain how SellALot, LLC, C and S Partnership,and Mega Bucks Bank would each be liable for the vitamin pill litigation.   

4. What is your recommendation to your client, Private Equity, LLC and why is this your recommendation?

Koh Brothers Limited acquired a factory for $54 million on June 30, 2013, to produce hospital machines and equipment. The company estimated the factory has a useful life of 25 years with $2 million in residual value at the end of its useful life. The company adopted a straight-line depreciation method for all its property, plant, and equipment. The factory’s market value appreciated steadily to $60 million at the end of the company’s financial year, December 31, 2013. On June 30, 2014, the factory was sold for cash at $59 million. Assume that Koh Brothers Limited rented out the factory to another unrelated party. Show the journal entries if the company account for the factory using the fair value method.

Read the case about the conflict between McDonald's and its franchisees. Then, using the 3-step problem-solving approach, answer the questions that follow. Background and Scale Sixty-nine million. That is the number of customers McDonald’s serves per day around the world! The company does a staggering volume of business. But it might surprise you that despite the brand’s global reach and incredible staying power, it is in the midst of a serious conflict with its other important customers—its franchisees. McDonald’s has 5,000 franchisees around the world who run 82 percent of the chain’s 36,000 restaurants, accounting for just under $30 billion or a third of the company’s total revenue and employing 90 percent of its employees. This means the average franchisee operates six to seven restaurants, and the company lives or dies by their performance.1 Trouble under the Golden Arches The relationship between the company and its franchisees is very complicated and increasingly strained. While franchisees own their respective businesses, McDonald’s owns the land and buildings they use. That means the company is the landlord and has ultimate say over whether particular restaurants open or close. The company also largely dictates menu items, required equipment, and most other details, including pricing in many instances. (One franchisee said he controls the price of fewer than 20 of 100 menu items.)2 Franchisees must follow directions from the company and pay an assortment of expenses and fees, such as rent of 15 percent of revenues, a royalty of 5 percent of revenues, and 5 percent of revenues for advertising.3 On top of this, various additions to the menu require new equipment. The McCafe coffee and espresso equipment can cost up to $20,000 per machine, expanding grill space to accommodate all-day breakfast takes another $5,000, and installing a second drive-thru window can cost $100,000.4 A milkshake machine costs $20,000, and a new grill $15,000.5 While the corporation focuses on the restaurants’ top line, operators worry about what’s left after paying rent, payroll, royalties, and other expenses.6 Last but not least, if the movement to boost minimum wages to $15 across the country succeeds, the burden will fall on the franchisees. McDonald’s decided to raise wages in all its corporate-owned restaurants to $1 above the minimum wage. The move was presumably intended to help keep up with similar wage hikes by Walmart and Target,7 with whom the company often competes for employees. The problem? Corporate stores compete with franchisees too and don’t bear the costs outlined above. A wage hike will likely have a much smaller impact on the corporate-owned stores versus the franchisees. Impact and Potential Causes The franchise model has worked very well for McDonald’s and the majority of its franchisees. Revenues have exceeded expenses and many franchisees have become quite wealthy, which explains why many own multiple restaurants. However, franchisee satisfaction and performance have steadily declined. In 2015, for the first time McDonald’s closed more stores than it opened, and the level of same-store sales (a key performance measure) also declined. Franchisees and Wall Street analysts attribute much of the lackluster performance and conflict to poor corporate leadership and policies. Corporate leaders dictate menu items, pricing, and strategy to franchisees. The addition of McWraps, salads, yogurt parfait, and specialty coffees, for instance, were meant to compete with the likes of Chipotle, Burger King, Shake Shack, and Wendy’s, as well as to keep up with evolving customer tastes.8 Boosted sales is certainly a good outcome for the corporate arm of the company, given it takes a cut of all revenues, but franchisees argue that enough money isn’t left over for them. Some initiatives, like the dollar menu, are actually money losers for some franchisees, yet it is difficult not to offer them because of national advertising that promotes them, not to mention pressure from regional and corporate representatives. Another franchisee provided an example. “One time our coffee price was a nickel over what the advertising price was and the head of the McDonald’s region came in and he said: ‘You are over. You can’t do this.’ That was the first time he told us to sell our business.”9 Beyond the financial implications, many franchisees also feel various initiatives have eroded the McDonald’s brand, which makes “the promise of serving good-tasting food fast.” The company requires that any order be filled in 90 seconds or less, which many franchisees say is unrealistic for many (new) menu items. These standards will be put to the test yet again with the “Create Your Taste” initiative, which allows customers to personalize their burgers. One longtime but now former franchisee, Al Jarvis, said in an interview that he “loves the taste, but the complexities of making it came to epitomize his disillusionment with McD’s. ‘The service times went up because of the expansion of the menu … I think they went a little overboard. When I would … see cars backed up at the drive-thru my stomach would just knot up. The people were different, the company was different. It became very frustrating … I wanted to get the hell out.’” And he did.10 There is evidence to support Jarvis’s concerns. The American Customer Care Satisfaction Index Restaurant Report for 2015 ranked McDonald’s dead last among all fast-food restaurants. This index measures staff courtesy, speed of checkout or delivery, food quality, and order accuracy.11 The frustration Jarvis expressed is increasingly common and has generated an “us vs. them” dynamic between franchisees and McDonald’s corporate staff. Franchisees also perceive that McDonald’s is using them as a shield, for instance, in deflecting the question of wages by saying it is up to franchisees to do as they see fit. Doing one thing at corporate-owned stores, which account for only 10 percent of employees, and doing something else at franchise stores has the potential of creating more intense conflicts. Steve Easterbrook, relatively new as CEO, is aware of the performance challenges and determined to make significant changes. It will be up to McDonald’s employees and franchisees at all locations to effectively implement them.12 Utilizing the example outlined, post your response to Connect Case: What About McDonald’s Other Customers. Your posting will look like: Stop 1: (Define the problem in the case.) Stop 2: (Identify the OB concepts or theories to use to solve the problem.) Stop 3: (Explain what you would do to correct the situation.)

Read the case about the conflict between McDonald's and its franchisees. Then, using the 3-step problem-solving approach, answer the questions that follow. Background and Scale Sixty-nine million. That is the number of customers McDonald’s serves per day around the world! The company does a staggering volume of business. But it might surprise you that despite the brand’s global reach and incredible staying power, it is in the midst of a serious conflict with its other important customers—its franchisees. McDonald’s has 5,000 franchisees around the world who run 82 percent of the chain’s 36,000 restaurants, accounting for just under $30 billion or a third of the company’s total revenue and employing 90 percent of its employees. This means the average franchisee operates six to seven restaurants, and the company lives or dies by their performance.1 Trouble under the Golden Arches The relationship between the company and its franchisees is very complicated and increasingly strained. While franchisees own their respective businesses, McDonald’s owns the land and buildings they use. That means the company is the landlord and has ultimate say over whether particular restaurants open or close. The company also largely dictates menu items, required equipment, and most other details, including pricing in many instances. (One franchisee said he controls the price of fewer than 20 of 100 menu items.)2 Franchisees must follow directions from the company and pay an assortment of expenses and fees, such as rent of 15 percent of revenues, a royalty of 5 percent of revenues, and 5 percent of revenues for advertising.3 On top of this, various additions to the menu require new equipment. The McCafe coffee and espresso equipment can cost up to $20,000 per machine, expanding grill space to accommodate all-day breakfast takes another $5,000, and installing a second drive-thru window can cost $100,000.4 A milkshake machine costs $20,000, and a new grill $15,000.5 While the corporation focuses on the restaurants’ top line, operators worry about what’s left after paying rent, payroll, royalties, and other expenses.6 Last but not least, if the movement to boost minimum wages to $15 across the country succeeds, the burden will fall on the franchisees. McDonald’s decided to raise wages in all its corporate-owned restaurants to $1 above the minimum wage. The move was presumably intended to help keep up with similar wage hikes by Walmart and Target,7 with whom the company often competes for employees. The problem? Corporate stores compete with franchisees too and don’t bear the costs outlined above. A wage hike will likely have a much smaller impact on the corporate-owned stores versus the franchisees. Impact and Potential Causes The franchise model has worked very well for McDonald’s and the majority of its franchisees. Revenues have exceeded expenses and many franchisees have become quite wealthy, which explains why many own multiple restaurants. However, franchisee satisfaction and performance have steadily declined. In 2015, for the first time McDonald’s closed more stores than it opened, and the level of same-store sales (a key performance measure) also declined. Franchisees and Wall Street analysts attribute much of the lackluster performance and conflict to poor corporate leadership and policies. Corporate leaders dictate menu items, pricing, and strategy to franchisees. The addition of McWraps, salads, yogurt parfait, and specialty coffees, for instance, were meant to compete with the likes of Chipotle, Burger King, Shake Shack, and Wendy’s, as well as to keep up with evolving customer tastes.8 Boosted sales is certainly a good outcome for the corporate arm of the company, given it takes a cut of all revenues, but franchisees argue that enough money isn’t left over for them. Some initiatives, like the dollar menu, are actually money losers for some franchisees, yet it is difficult not to offer them because of national advertising that promotes them, not to mention pressure from regional and corporate representatives. Another franchisee provided an example. “One time our coffee price was a nickel over what the advertising price was and the head of the McDonald’s region came in and he said: ‘You are over. You can’t do this.’ That was the first time he told us to sell our business.”9 Beyond the financial implications, many franchisees also feel various initiatives have eroded the McDonald’s brand, which makes “the promise of serving good-tasting food fast.” The company requires that any order be filled in 90 seconds or less, which many franchisees say is unrealistic for many (new) menu items. These standards will be put to the test yet again with the “Create Your Taste” initiative, which allows customers to personalize their burgers. One longtime but now former franchisee, Al Jarvis, said in an interview that he “loves the taste, but the complexities of making it came to epitomize his disillusionment with McD’s. ‘The service times went up because of the expansion of the menu … I think they went a little overboard. When I would … see cars backed up at the drive-thru my stomach would just knot up. The people were different, the company was different. It became very frustrating … I wanted to get the hell out.’” And he did.10 There is evidence to support Jarvis’s concerns. The American Customer Care Satisfaction Index Restaurant Report for 2015 ranked McDonald’s dead last among all fast-food restaurants. This index measures staff courtesy, speed of checkout or delivery, food quality, and order accuracy.11 The frustration Jarvis expressed is increasingly common and has generated an “us vs. them” dynamic between franchisees and McDonald’s corporate staff. Franchisees also perceive that McDonald’s is using them as a shield, for instance, in deflecting the question of wages by saying it is up to franchisees to do as they see fit. Doing one thing at corporate-owned stores, which account for only 10 percent of employees, and doing something else at franchise stores has the potential of creating more intense conflicts. Steve Easterbrook, relatively new as CEO, is aware of the performance challenges and determined to make significant changes. It will be up to McDonald’s employees and franchisees at all locations to effectively implement them.12 Utilizing the example outlined, post your response to Connect Case: What About McDonald’s Other Customers. Your posting will look like: Stop 1: (Define the problem in the case.) Stop 2: (Identify the OB concepts or theories to use to solve the problem.) Stop 3: (Explain what you would do to correct the situation.)

Profit Center Responsibility Reporting for a Service Company

Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

The company operates three support departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

Required:

1. Prepare quarterly income statements showing operating income for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

2. What is the profit margin of each region? Round to one decimal place.

Identify the most successful region according to the profit margin.

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the regions?

1. The method used to evaluate the performance of the regions should be reevaluated.
2. A better regional performance measure would be the return on investment (operating income divided by regional assets).
3. A better regional performance measure would be the residual income (operating income less a minimal return on regional assets).
4. None of these choices would be included.
5. All of these choices (a, b & c) would be included.

Terry J. Lundgren, CEO and president of Macy's, was asked, “[Do you have] any job-seeking advice for college grads?” Here's what he had to say:

Use whatever contact you have to try to get your résumé read. That's the most important thing—just to get it in front of people. Because we're all flooded with, of course, thousands and thousands of résumés in a company of our size, and getting your résumé read is not an automatic. And so do what you can do to get it in front of the people who matter who will read it. It's not the CEO typically, by the way; it's the HR person or the head of recruiting or head of training or whatever. Third, don't stop there. Don't just do it online, because it's easy to do it online. Do it online and then put it in an envelope and send it to the top company that you're interested in pursuing. And then follow up with a phone call, and talk to the assistant and say: “I just want to make sure that my résumé's getting read. I'm very interested in your company, and it's really important to me. And I just want to know—can you give me advice?—is there anything that I can do to get my résumé in front of your boss?” Whatever you have to say, just to show the most important thing—that you're hungry. And to convince them, maybe you use a little of your acting skills. And I'll probably relate it to college dating—you know, use a little, “I'm really interested in you”— to say: “This is the company I want to work for. Yours is the company that I want to work for.” And then once you get, hopefully, more than one opportunity, you're back in charge to say, “Where do I want to go and where do I want to work.”31

Based on Lundgren's comments and please include your own real-world perspectives and experiences, respond to the following questions:

1. Explain what Lundgren means by showing “you're hungry” for a position. Describe ways in which you can show hunger in a positive way. How have you done this in your past experiences?

2. What does he suggest about the effectiveness of relying exclusively on electronic means to submit job applications? What combination of communication channels do you consider optimal for gaining a job of interest? Any stories from your own life on what worked and didn't work when you used electronic submission practices?

3. He suggests that you should view the process like dating. In what ways does this analogy make sense to you? Explain.