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McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

McPhee Distillers: Accounting
Policy Choices in the
Preparation of Financial
Statements
1
...


Find attached excel sheets (McPhee Distillers
...


1/14

McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

rodoctlon Equipment Is boucht for a total lnstillled cost of SS00
...
mels It• disccuu:ed p,lce cl $7,SOO (•Sl0,000 • B"I
se barrels curled ii (QU per unit cf $6,000, H they Cclllffll!! from b
...
000 PH unit (FlfO)

...
It summarizes all
debits and credits of the individual accounts and calculating the changes within the
year
...

All costs from Exhibit 3 (e
...
, Lease, Salaries & Wages, etc
...

The Cost of Goods Sold (COGS) was calculated using the first-in, first-out method
...

Examples:
In 2015, Elsa spent $25,000 on supplies
...
The journal
has an entry, which debits SG&A with $25,000 and credits cash with an equal amount
...

Inventory is debited with $700,000, and Accounts Payable is credited with the same
amount
...

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McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

The changes from the yearly tabs were copied and linked to the Statements tab into the
Yearly Ledger changes
...


•

Revenue

S00
...
000

250
...
500)

50(1'
...
437
...
000

1
...
SOO

50
...
000)


...
000

1
...
000

COGS

,
...
437
...
687
...
000

490
...
000

50
...


2
...
000

21
...
000

Net Income

2
...
500
1
...
000
362
...
000
7

1 7
...
000

lll7
...
500

50
...
000

50
...
000

227
...
000

(487
...
000

(500
...
000)

Total Investing cash Flows
Comm on Sha res issued
Preferred Sha res issued
Tot
...
000
500
...
'i Cash
ndi111 Ca
...
000

750
...
000
22
...
232
...
000

22
...


2
...

1
...
In 2015, McPhee bought PP&E for $5ook and increased its
assets significantly by producing inventory at almost $1
...
This increase was
balanced with an increase in liabilities of $7ook and significant retained earnings of
$21ok
...

Looking at the income statement alone, one could say that 2015 was a highly successful
year for the company, while in 2016, it made losses of $127,500
...
The
total cash flow of 2016 was much better than in 2015
...
28
ROE 2016: net income/ equity= -127,500 / 750,000 = -0
...
However, we can see that net income is an issue for the
company
...

2
...
Her business carries both fixed costs and variable costs
...

2
...


Variable Costs

Every batch carries a variable cost that is calculated per barrel
...
The
limited supply of oak and the surge of demand for barrels create a major shortage and


...

This scenario increases variable costs between Elsa's first batch and her 6th batch by
more than 40%!
The variable costs per batch:
Variable Cost per
barrel

Batch 1

GA$

Variable Cost per
barrel

GA$

6
...
000,00

Batch4

CA$

1
...
000,00

-Batch 6

CA$

s
...
-1

6
...
BatohS

Change to
previous batch

previous

I

I

I

batch

8,3 %

8,3 %

7
...
1 %

25,0 %

67%

33,3 %

6,3 %

41
...
2
...
000 for the creating of the
corporate branding and logo
...

2
...
1
...
Elsa clearly states that the regular sales in the first year were below
expectations
...

While we know that there is significant demand in the market, McPhee's
Advertising & Promotion efforts do not seem to show success when it comes to
materializing in actual sales revenue
...

Advertising and Promotion costs should not be cut
...
However, McPhee Distillers needs to tailor-make their marketing
collateral around the purpose of the company and clearly state the claim to
increase sales and efficiency of the Advertising & Promotion expenses
...
2
...


Lease

McPhee Distillery has signed a 5-year contract for a disused shipyard for $5,000
per month
...
It is
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McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

highly unlikely that Elsa will be able to renegotiate the contract and achieve a
reduction in this expense
...

2
...
3
...
5% of the total fixed
costs of McPhee Distillery
...

Office & Administrative expenses should not be reduced
...
2
...
Salaries & Wages
McPhee Distillery faces the challenge that skilled distillers are sought after during
the current boom in the industry
...

Elsa states that she is already operating with as few staff members as possible
...
Salaries & wages should not be reduced
...
2
...
Repairs & Maintenance
The expenses for repairs and maintenance is very high
...
This equipment
proved to be unreliable and problematic
...

While the limited number of batches per year might not be an issue in the current
situation - as she reduces production to meet demand - it will expose her to
limitations in the future
...
Given the initial purchase
price of $500,000, the expected lifetime of 10 years, and annual expenses for
Repairs and Maintenance of $75,000, McPhee will have spent €1,250,000 on the
equipment after ten years
...

Considering an investment of new equipment for $1m, Elsa could sell the current
used equipment for the market value of $400,000
...
Elsa
should invest in new equipment and sell the current set-up
...
It will also
enable her to scale up production in the future
...
2
...


Supplies/ Utilities

These expenses can be analyzed together
...

Therefore the costs for supplies and utilities are high due to the strict production
process
...
This should be avoided
...

2
...
7
...

Half of these costs relate to the inspection and maintenance of the finished barrels
...
And she should
also ship the sold barrels to the buyers after purchase so that the Whiskey can
mature at the buyer's location rather than at McPhee Distillery
...

3
...

To do so, we take the contribution margin of the Whiskey barrels into consideration
...
This is achieved by subtracting the variable costs from the
sales price
...
1, the variable costs have increased significantly
throughout the production schedule
...
This results in a lowering of the margin that
McPhee can achieve
...
000,00 CA$

1
...
500
...
000,00

Batch3

CA$

3
...
500 00 CA$

Batch5

CA$

2
...
500,00 CA$

-

I

soo
...
000,00)

-

As the above table shows, the contribution margin drops per batch, especially when it
comes to discounted sales to Piercy Distillery
...
Piercy Distillery sales carry a contribution
margin of $1,500 in the first batch
...
This means that for every barrel that Elsa sells to Piercy
Distillery in 2017 (which is year 3 of her business), she will have to pay a premium
...


Conclusion
While Elsa has a promising business venture, she has to tackle her costs and introduce
a pricing that reflects the increase in costs and offers a more substantial contribution
margin to the fixed costs of her business
...

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3/13/2021

McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

• McPhee should spend more on Marketing & Advertising to increase sales
...


Second Solution

Evaluation of the Financial Health of McPhee Distillers
Executive Summary- McPhee Distillers: Accounting Policy Choices
in the Preparation of Financial Statements
This evaluation is addressing the key questions to the business of McPhee Distillers of
business model profitability, potential improvements to operations, and, last but not
least, if the business should be continued or not
...

Cornerstones are an adaption of the Storage model top lower costs, the introduction of
a second line for mid-market to increase Cash Flow, and a boost to marketing activities
to increase brand awareness and sales
...

The business model has much more potential to increase sales and reduce operating
expenses, which are outlined below
...
However, this is misleading: despite a negative net income, total cash flow
increased in year 2
...
This is because of 2 reasons:
• More inventory was sold than manufactured, which causes COGS per barrel to
decrease when batch size goes up
...
If COGS remained constant, year two would have a positive
net income of$ 135
...

• Revenue was lower because more barrels have been sold with a discount
...
With instant
payment, the customer will have to wait for 12y for the Whiskey to age
...

The main bottleneck is the availability of virgin and second-hand barrels
...


SWOT Analysis

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3/13/2021

McPhee Distillers: Accounting Policy Choices in the Preparation of Financial Statements

Weaknesses

Strengths
+ independent, flexible

- Lovv Sa'liary

+ Premium price can be profirtable with
lower quantity

- Overhead costs Ii�e repair & storage
costs

provable track of experience; owner has
strong reputation

- unreliable equipment pmducing
unexpected high costs

+

- Low Markeilling budget
'Opportunities
+ Premium price model trough
differenti abon
+

growing demand for Bm
...

• Repair costs for the equipment are unexpectedly high
...

• Marketing is underrepresented and therefore, can add good leverage for increased
Demand Generation
...


Conclusions & Recommendations for the Management
To increase revenue, it is recommended to offer a staggered pricing model to
compensate for regular cost increase and storage costs for unsold barrels
...
Additional
analysis of staggered sales price is recommended
...
Therefore, it is recommended to raise the credit of $ 1M to invest in new
production equipment for 1M
...
The expected salvage value of 350k should be invested in Marketing
equally for 3y to expand brand awareness and boost sales
...


14/14

Yearly Ledger Changes
Account
Year 0
Year 1
Year 2
Cash
750,000
(727,500)
210,000
Inventory
1,187,500
(775,000)
PP&E
500,000
Accounts Payable
700,000
(487,500)
Paid-in Capital
750,000
Revenue
2,437,500
2,312,500
COGS
1,687,500
1,950,000
Operating Expenses
490,000
440,000
50,000
Depreciation Expense
50,000
(50,000)
Accumulated Depreciation
(50,000)

Account
Assets
Cash
Inventory
PP&E
Accumulated Depreciation
Total Assets
Liabilities and Equity
Accounts Payable
Paid-In Capital
Retained Earnings
Total Liabilities and Equity

Balance Sheet
Year 0
750,000

750,000
750,000

Year 1

Year 2

22,500
1,187,500
500,000
(50,000)
1,660,000

232,500
412,500
500,000
(100,000)
1,045,000

700,000
750,000
210,000
1,660,000

212,500
750,000
82,500
1,045,000

Account
Revenue
COGS
Gross Profit
Operating Expenses
EBITDA
Depreciation Expense
EBIT
Net Income

Income Statement
Year 0
Year 1
Year 2
2,312,500
2,437,500
1,687,500
1,950,000
362,500
750,000
490,000
440,000
260,000
(77,500)
50,000
50,000
(127,500)
210,000
(127,500)
210,000

Cash Flow Statement
Account
Year 0
Year 1
Year 2
Net Income
210,000
(127,500)
Depreciation
50,000
50,000
Change in Inventory
(1,187,500)
775,000
Change in Accounts Payable
700,000
(487,500)
Total Operating Cash Flow
(227,500)
210,000
Purchase of PP&E
Total Investing Cash Flows

(500,000)
(500,000)

Increase in Paid-In Capital
Total Financing Cash Flows

750,000
750,000

Total Cash Flows
Beginning Cash
Ending Cash

750,000
750,000

(727,500)
750,000
22,500

210,000
22,500
232,500

Debited Account
Cash
COGS

Cash
COGS

Cash
COGS

Operating Expenses
PP&E
Operating Expenses
Inventory
Accounts Payable
Inventory
Accounts Payable
Inventory
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Depreciation Expense
Total Year 1

Journal Year 1
Credited Account

Revenue
Inventory

Revenue
Inventory

Revenue
Inventory
Cash
Cash
Cash
Accounts Payable
Cash
Accounts Payable
Cash
Accounts Payable
Cash
Cash
Cash
Cash
Cash
Cash
Cash
Accumulated Depreciation

Debit

937,500
750,000

750,000
450,000

750,000
487,500

60,000
500,000
50,000
1,200,000
1,200,000
975,000
975,000
700,000
75,000
15,000
50,000
75,000
25,000
40,000
100,000
50,000
10,215,000

Credit

937,500
750,000

750,000
450,000

750,000
487,500
60,000
500,000
50,000
1,200,000
1,200,000
975,000
975,000
700,000
75,000
15,000
50,000
75,000
25,000
40,000
100,000
50,000
10,215,000

Account
Cash
Inventory
PP&E
Accounts Payable
Paid-in Capital
Revenue
COGS
Operating Expenses
Depreciation Expense
Accumulated Depreciation
Total Year 1

Usual Balance
Debit
Debit
Debit
Credit
Credit
Credit
Debit
Debit
Debit
Debit

Ledger Year 1
Total Debits
Total Credits
Change from Previous Year
2,437,500
3,165,000
(727,500)
2,875,000
1,687,500
1,187,500
500,000
500,000
2,175,000
2,875,000
700,000
2,437,500
2,437,500
1,687,500
1,687,500
490,000
490,000
50,000
50,000
50,000
(50,000)
10,215,000
10,215,000
6,275,000

Year 1:
1
...
000$
2
...
000$
3
...
500$
4
...
500
...
Shipyard lease: 60
...
SH equipment: 500
...
Creative agency: 50
...
Barrels produced (450): 2
...
000$‬ - 700
...
175
...
Advertising and Promotion: 75
...
Office and Administrative: 15
...
Salaries and Wages: 50
...
Repairs and Maintenance: 75
...
Supplies: 25
...
Utilities: 40
...
Werehousing: 100
...
Barrels sold (175 to Piercy): 1
...
500$
2
...
000
...
Barrels produced (150): 1
...
000‬$ + 700
...
875
...
500$)
4
...
000$ / year
5
...
000$
6
...
000$
7
...
000$
8
...
000$
9
...
000$
10
...
000$
11
...
000$



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