Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December

2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei

Province, China. The illness was reported to the World Health Organization and there is heightened

uncertainty around the Globe.

You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it

expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that

Porsche’s management entertains three scenarios:

Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.

Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.

Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.

Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are

realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to

be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping

an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per

vehicle.

The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€.

The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team

made the following forecasts about the exchange rates at the end of December 2020:

• bid-ask will be $1.45/€ - $1.465/€ if the investors (and speculators) consider the euro (€) a safe

haven currency during the pandemic.

• bid-ask will be $0.88/€-$0.90/€ if the investors (and speculators) consider the U.S. dollar ($) a

safe haven currency during the pandemic

1. As the CFO, you decided to hedge using option contracts. Assuming expected final sales

volume is 35,000, what are your total revenue and the percentage revenue from hedging

(compared to no hedging) (do not use any variable costs to calculate in this question)

a) if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€?

b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?

2. Assume that the Scenario 2 (Pandemic) took place in 2020 and the euro became a safe haven

currency during the pandemic. What are your euro cash flows if you did not hedge, hedged

using forward contracts, and hedged using option contracts?

Santana Rey, owner of Business Solutions, decides to prepare a statement of cash flows for her business using the following financial data.
  

Required:
Prepare a statement of cash flows for Business Solutions using the indirect method for the three months ended March 31, 2020. Owner Santana Rey contributed $26,000 to the business in exchange for additional stock in the first quarter of 2020 and has received $3,900 in cash dividends. (Amounts to be deducted should be indicated with a minus sign.)

The 2020 inventory data for Garden Corporation’s patio furniture Bermuda set is presented below. Assume that Garden uses periodic inventory tracking.

When Garden examines the actual units in ending inventory, they see that 15 of the units are from 2020 beginning inventory, 20 units are from the 1/20/20 purchase, and 60 units are from the 6/15/20 purchase.  

1. In a period of falling prices, which of the following statements is true?
   1. FIFO produces a lower amount of net income than LIFO
   2. LIFO produces a lower cost for ending inventory than FIFO
   3. Average cost produces a higher net income than FIFO or LIFO
   4. LIFO produces a higher cost of goods sold than FIFO

2. Heavenly Rest, Inc. uses a periodic inventory system. When a warehouse supervisor counts the inventory on December 31, 2019, he accidentally counts one pile of blankets twice, resulting in 2019 ending inventory being overstated by $100,000. The warehouse supervisor counts the December 31, 2020 inventory correctly. Which of the following statements is true related to Heavenly Rest's 2019 and 2020 financial statements?
   1. 2019 Cost of Goods Sold will be understated by $100,000.
   2. 2020 Beginning Inventory will be understated by $100,000.
   3. 2020 Cost of Goods Sold will be overstated by $100,000.
   4. All of the above are true.
   5. Both a and c are true.

3. On October 28, Unilever sells and ships $100,000 worth of merchandise to Target. The goods are shipped FOB shipping point and arrive at Target stores on November 4. Which of the following statements is TRUE?
   1. The goods are in transit on October 31 so neither company includes the $100,000 as part of its October 31 Inventory balance.
   2. Unilever includes the $100,000 as part of its October 31 Inventory balance.
   3. Target includes the $100,000 as part of its October 31 Inventory balance.
   4. Both companies include the $50,000 as part of their October 31 Inventory balances.

Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December

2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei

Province, China. The illness was reported to the World Health Organization and there is heightened

uncertainty around the Globe.

You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it

expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that

Porsche’s management entertains three scenarios:

Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.

Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.

Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.

Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are

realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to

be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping

an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per

vehicle.

The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€.

The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team

made the following forecasts about the exchange rates at the end of December 2020:

• bid-ask will be $1.45/€ - $1.465/€ if the investors (and speculators) consider the euro (€) a safe

haven currency during the pandemic.

• bid-ask will be $0.88/€-$0.90/€ if the investors (and speculators) consider the U.S. dollar ($) a

safe haven currency during the pandemic

1. As the CFO, you decided to hedge using option contracts. Assuming expected final sales

volume is 35,000, what are your total revenue and the percentage revenue from hedging

(compared to no hedging) (do not use any variable costs to calculate in this question)

a) if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€?

b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?

2. Assume that the Scenario 2 (Pandemic) took place in 2020 and the euro became a safe haven

currency during the pandemic. What are your euro cash flows if you did not hedge, hedged

using forward contracts, and hedged using option contracts?

In June 2004, Jen Kluger and Suzie Orol received a phone call from Sarah Gibson, one of their retail customers, in Winnipeg, Manitoba. Gibson called with a complaint about how many of her competitors now carried Foxy Originals jewelry. Gibson’s store had been the exclusive carrier of Foxy Originals jewelry in the Winnipeg area for a number of years. With the growing popularity of its designs, many stores in the area now carried the Foxy Originals line. Kluger and Orol, owners and partners of Foxy Originals, were worried. If they continued to saturate the Canadian market, they would be faced with similar concerns from customers across Canada. The partners realized that it was time to grow the outside Canada, and they were excited about the possibility of selling their jewelry in the United States. Their goal was to enter the U.S. market by January 2005, but they would first have to decide on the best method of distribution attending trade shows or hiring sales representatives.

Jen Kluger and Suzie Orol believed that life should be fun and full of excitement, and they founded Foxy Originals based on these beliefs. These two young jewelry designers met while attending The University of Western Ontario, and they set out with a vision to make high style fashion jewelry accessible to young women. Both partners had experience in the jewelry industry. Orol’s parents owned a metal manufacturing company that focused on making jewelry and medals for companies and community groups. Orol was involved in the family business from a young age. Kluger had been designing and selling her own line of necklaces since she was in Grade 11.Kluger and Orol started their business, Foxy Originals (Foxy), in 1998. They sold a modest line of jewelry to friends and acquaintances on campus while attending university. In the summers before graduation, the partners took Foxy on the road to various outdoor festivals and summer concerts. The results were very positive. Upon graduation, with business degrees in their back pockets, Kluger and Orol left corporate job offers behind to work full time at Foxy. The partners spent their time designing new product lines and promoting Foxy in new markets. As the company grew and the jewelry that sold at festivals and summer concerts became more popular, Kluger and Orol began selling their jewelry to retail stores. Each retail account took a significant amount of time to develop, with the partners personally contacting and meeting with each store’s product buyer. The partners were very successful at selling to retailers due to their high energy, enthusiasm and knowledge of the product. As a result, in the first three years of operations, the company’s sales had doubled every year. Sales were continuing to grow at a rapid pace. Kluger and Orol were always very enthusiastic about their designs, and Canadian retailers began placing orders for Foxy jewelry after meeting these dynamic founders and learning about the products. It wasn’t long before Foxy jewelry could be found in 250 boutiques across Canada. Kluger and Orol personally sold (i.e., they had no sales representatives) their product lines to every retailer in Canada and managed all operations. Kluger and Orol described Foxy as a company that managed to stay two steps ahead of the latest trends: In doing so, our collections remain fresh, fun and funky. We realize that in this day and age, being hip and trendy comes at a high cost; not so with Foxy. We are able to provide a selection of necklaces, earrings, bracelets and rings that are truly fashion-forward, at a reasonable price.

Foxy jewelry offered high style and high quality at an affordable price point and targeted women between the ages of 18 to 30 who were style- and price-conscious. The jewelry was designed for three groups of women: The Reversible Enamels Ladies, The Bridge Ladies and The Chain-lovin’ Ladies. Kluger and Orol explained each customer group: The Reversible Enamels Ladies: Reversible necklace enthusiasts are usually the very dedicated Foxy customers who have been following our company since Day 1. They are slightly more conservative with their style and use Foxy jewelry to add a little something special to their outfits. They love the idea that they are getting two necklaces for the price of one. (See Exhibit 1 for sample product preferences for this group.)The Bridge Ladies: These customers consist of young, suit-wearing professionals. They want to add a little accent to their suits, but they need to be careful how much they add. These customers go for the leather necklaces with the bigger pendants. (See Exhibit 2 for sample product preferences for this group.)The Chain-lovin’ Ladies: These customers are more fashion savvy and trendy. They read the fashion magazines and seek out “that look.” These ladies collect our big earrings and long necklaces. They layer the Foxy necklaces and try the newest collections as soon as they are in the stores. (See Exhibit 3 for sample product preferences for this group.)

Foxy jewelry was designed and produced in Toronto, Canada. Kluger and Orol designed all the jewelry, releasing two new collections every year. A collection or product line consisted of a number of different styles of necklaces, earrings and rings, where all styles were associated with a central theme such as “Royal Safari.” The designs were assembled by a small production team of professional crafts people.

All Foxy jewelry was made from pewter and coated in sterling silver, matte gold or bronze with a matte finish. Each item was then stamped with the Foxy signature to authenticate the designs (see Exhibit 4 for the Foxy signature tag). From this common starting point, the pieces were transformed into original works through the integration of enamel, stones, leather and ultrasuede.

Kluger and Orol had established a strong Foxy presence in the Canadian market, and they were now ready to expand into the United States. Financially, Foxy was healthy so any distribution costs related to the U.S. expansion could be financed from internal operations (i.e., no funding was needed). The key fashion hubs in the United States were New York, Los Angeles, Chicago and Dallas. Kluger and Orol did not want Foxy to be available on every street corner in every city. Instead, they preferred selling to reputable stores that suited the brand. Kluger and Orol decided to charge the same price for their products in the United States as they did in Canada (i.e., a necklace sold for Cdn$34 and, in the United States would sell for US$34). The U.S. jewelry market was more than 10 times larger than the Canadian jewelry market, offering a much greater opportunity for product exposure. Based on the success they had achieved in Canada, Kluger and Orol believed in their product, but they worried about how responsive the U.S. market would be to their jewelry designs. The partners believed that Canadians supported Canadian businesses and were brand loyal to companies that manufactured locally; however, they suspected that Americans preferred the latest trends regardless of the product’s origin. Classic jewelry (currently 50 per cent of Foxy merchandise in Canada) was also not as popular in the United States. Kluger and Orol would need to stay on top of Foxy’s fashion-forward designs to compete effectively.

Trade shows were one-stop marketplaces for retailers to source products from wholesalers and importers. They were positioned for registered personnel only, usually consisting of buyers from fashion boutiques, accessories, jewelry, gift, fashion chain, department and other specialty stores. These exhibitions were not open to the general public. U.S. trade shows were very large, often with over 75,000 buyers in attendance. Kluger and Orol planned to set up a booth at several trade shows in order to showcase Foxy jewelry to prospective buyers. Buyers would select what merchandise they would like to carry in their stores and would then place their orders with the exhibitor. The partners had plans to attend trade shows devoted to women’s fashion accessories, surf apparel and giftware. There were 10 potential trade shows for 2005 where Foxy could showcase its products. Registration for all shows needed to be complete by November 2004, at an average cost of $3,000 a show. The average trade show lasted three days, wherein Kluger and Orol would require five days of preparation and both would work nine hours a day at the trade show. Kluger and Orol were excited about attending the shows to learn about the U.S. jewelry market and to get ideas for new product innovations. Trade shows were a great way for the partners to personally sell their merchandise and to network with key people in the industry. The partners also loved to travel, and they looked forward to visiting the big U.S. fashion hubs. Because of the diverse attendance at these shows, it was difficult for the partners to predict at which retail stores their merchandise would be sold. Ideally, they preferred that all major fashion-forward stores within a geographic area would support Foxy’s merchandise; however, sales would likely be scattered across locations that were diverse in geography and brand image. One of the principal selling factors at trade shows was the exhibitors’ booth layout –– the more exciting and flashy the booth, the greater the number of visitors. The partners researched a number of booths and settled on one that would cost $4,000 and could be used for approximately 30 trade shows (see Exhibit 5 for booth display). The booth would have to be shipped to each trade show at an average cost of $1,500 a show. Plane tickets and related travel costs would average $2,000per show, and product samples and promotional materials would cost $2,800 per show. Kluger and Orol had friends in many U.S. cities, so they planned to stay overnight with them when visiting the shows.

The partners had estimated that an average retailer order would consist of 25 necklaces and 12 pairs of earrings. Retailers would purchase necklaces for $17 and earrings for $12 from Foxy, which they would then sell to their customers for $34 and $24 respectively. Shipping terms were FOB shipping point and cost an average of $15 an order. All necklaces consisted of a chain, a pendant, a label, a clasp, and labor fees for a total cost of $8.05 for each necklace. A pair of earrings cost approximately $5.50 to manufacture. The partners expected anywhere from 20 to 45 orders at each trade show. Historically, 50 per cent of retail buyers at the trade shows would reorder product approximately two times a year.

An alternative method of distribution would be to develop a sales force in the key fashion hubs in the United States. Sales representatives would carry 10 to 15 different brands, usually within the same category of products (i.e., accessories), and would sell to retailers in designated geographic zones. Kluger and Orol wanted to hire people who would be loyal and who could represent the appropriate Foxy brand attributes. Kluger and Orol noted: “The most important characteristics in sales representatives are that they believe in your product, and they are willing to get on the road or travel to show it well.” Kluger and Orol knew having a sales force would be a much faster way for Foxy to enter the market because of the sales representatives’ contacts in the industry, their relationships with existing retailers and the minimum amount of training they would require. They also knew it could be difficult to find the right people with the right characteristics to make this alternative work.

Sales representatives would be compensated with a 15 per cent commission on all sales.

They would also receive $200 a month towards rental space in their jewelry showrooms5(see Exhibit 6 for showroom display), two sets of sample boards6a year for a total cost of $2,900 and catalogues and promotional materials averaging $600 a year. Foxy would have to hire a part-time bookkeeper to pay the sales representatives because calculating sales commissions would be time-consuming and complicated. The bookkeeper’s fee would be $40 an hour, and this person would be required for 48 hours a year. Travel expenses, such as gas and mileage were not covered by Foxy. Production costs and retailer order size were the same for this option as for the trade show option. The average sales representative would sell between 10 to 15 orders each month. The 10 to 15 orders included both new account sales and reorders from existing customers. If this option was chosen, Kluger and Orol planned to hire four sales representatives, one in each of the major cities of New York, Los Angeles, Chicago and Dallas.

Ideally, Foxy preferred to enter the U.S. market by attending trade shows and hiring a sales force. The problem with this alternative was territory ownership. For example, if Kluger and Orol attended a trade show in New York, and had hired a New York based sales representative, it was an industry norm that the sales representative would expect a 15 per cent commission from sales made at the New York trade show. Kluger and Orol investigated structuring the sales representatives’ commission package based on sales they made personally rather than on all sales made within their geographic location. Sales representatives were unhappy with this alternative because not only would competition be created between sales representatives, but also between the sales representatives and Foxy. For example, sales representatives worked hard to establish contracts, and many times, contracts were signed with one store, and as a result, other stores would see the product and would want to carry it themselves. Sales representatives believed they should be compensated for these spillover sales, and they were concerned that the new retail stores could order directly from Foxy. To combat the issue of internal competition, the partners thought about attending trade shows in the major cities and having their sales force work in the smaller cities; however, smaller cities were not as fashion-forward, and would not help to establish the Foxy brand presence in the United States, the way sales representatives could in major cities. In the short term, Kluger and Orol decided to focus on just one of the distribution channels in order to limit the complexities of the U.S. expansion. If the partners decided to pursue both trade shows and sales representatives, it would be a longer-term strategy.

Kluger and Orol were excited about the U.S. opportunities, and they wanted to ensure they were entering the market with a solid strategy. The partners had built the business on the principles of having fun, gaining exposure for new product lines and staying ahead of fashion trends. To date, they had been highly financially successful in doing just this. Knowing the additional workload that the U.S. expansion would create, they hoped their profit would grow by at least $100,000. Both options appeared promising but not without risks. Kluger and Orol had to make a decision quickly to prepare for a January 2005 launch.

WITHOUT USING EXCEL:

1. Calculate the number of orders at a target profit of $100,000

Lisa’s Darwin Home

Lisa sold her home in Darwin (contract date September 2019, settlement December 2019), receiving $1,220,000 at settlement. This is after legal fees ($12,000), advertising ($2,000) and real estate commissions ($25,000) were deducted. Records indicate that Lisa purchased the property in 2002 (contract date January, settlement March) for $653,000. Legal fees, commissions and advertising of $8,000 were also incurred. Lisa moved in within 6 months, selling her former residence during that time. Over the ownership period, Lisa rented the property for three years beginning December 2010, with $65,000 of $120,000 in non-capital costs claimed against rental income. The property was valued at $890,000 at the time it began being rented. Sculpture Lisa gave a sculpture, valued at $18,900, to her friend in June 2020.

The sculpture was purchased for $480 in December 2000 and repaired in March 2016 for $1,250.

Vase

When Lisa was playing with her cat in September 2019, the cat accidentally knocked over and broke a vase given to her by her grandmother in September 2018 (worth $6,100 at that time). The vase dated back to the Australian gold rush (circa 1850's) and, after undertaking some research, she discovered it was currently worth approximately $27,000. Lisa did not have insurance for the item. Cryptocurrency Lisa converted cryptocurrency into $27,200 Australian dollars in October 2019. To complete the transaction, she incurred $950 in transaction fees. Therefore, Lisa received $26,250 in cash. Lisa had acquired the cryptocurrency in September 2018 for $9,200 Australian dollars.

Shares Lisa sold

shares she held in a construction company in March 2020 for $182,000. She had purchased the shares for $37,200 in December 1986. Lisa has indicated that she has carried forward losses from prior years of $180,000 relating to a prior disposal of shares and land. We will have a meeting first thing Monday morning, so please complete your analysis by the end of Friday so I can review her circumstances over the weekend.

Required: You are required to calculate Lisa’s Net Capital Gain (loss) for the year ending 30 June 2020 based on the above information provided. In doing so, you must present an accurate and complete analysis.

Qa) Determine the taxable capital gain (loss) on the sale of the home. Briefly justify your answer/show all workings.

Qb) Determine the taxable capital gain (loss) on the sale of the Sculpture. Briefly justify your answer/show all workings

Qc) Determine the taxable capital gain (loss) on the sale of the Vase. Briefly justify your answer/show all workings

Qd) Determine the taxable capital gain (loss) on the sale of the Cryptocurrency. Briefly justify your answer/show all workings.

Qe) Determine the capital gain on the sale of the Shares. Briefly justify your answer/show all workings A.6 Determine the Net Capital Gain and/or Loss for Lisa. Briefly justify your answer/show all workings.

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $184,000, and which was three-fourths depreciated, was sold for $7,000.
2. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
3. Property was acquired by issuing a 13%, seven-year, $48,000 note payable to the seller.
4. New equipment was purchased for $69,000 cash.
5. On January 1, 2021, bonds were sold at their $43,000 face value.
6. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
7. Cash dividends of $31,000 were paid to shareholders.
8. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:
Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

10 states comparable in the state size, purchasing power and wealth were selected to investigate the effect of marketing expenditures on sales of televisions. For each state, the marketing expenditure X-thousands of dollars and the sales Y-units sold are shown below:

Find the 95 percent confidence interval for predicting the mean sales of all states in which the marketing expenditure is 6.0 (thousand dollars).

Marketing expenditure of 3.7 (thousand dollars) was made in the one of the states. Find an interval which has a 95 percent probability of including that state's sales.