Accounting Case Help

Jack and Melanie initially invested $50,000 into the business. They also obtained a $100,000 loan from Jacks uncle, Sam, which has an annual interest rate equal to 5% of net income and is payable on demand. Over the summer, Sam came up with a new business idea: a fishing gear store in cottage country. He notified the Parkers that he might ask for the loan to be paid back if he decides to proceed with the venture. However, he also said that he will not ask for the loan back if its return is better than the expected return on his future business venture. The Parkers decided to approach The Small Bank for a $100,000 loan, just in case Sam asks for his loan to be repaid. The bank requested an audit of the 2016 financial statements for the year ending September 30 and made it clear they will require WCI to show a current ratio of 2:1, which WCI will need to maintain if the loan is approved. That is why the Parkers hired you to help sort through the accounting issues. Melanie asks you to prepare a report about any significant accounting and other potential problems. WCI follows ASPE.

I heard that having strong internal controls is very important for a start-up business, Melanie says. Would you be able to highlight our significant internal control weaknesses, if you find any, and provide recommendations?

Operations

Melanie is responsible for maintaining all accounting records. Since she had no previous accounting training, she started a 6-month advance accounting course at a local college in January 2016. WCI paid for the course as it was business related. Melanie regrets not taking the introductory level first as she remains unclear on the difference between cash and accrual accounting at the practical level.

Both Jack and Melanie are fully involved with the business and spend most of their time at the store. One or the other handles the cash register transactions whenever they are there. For better customer service, the store stays open until midnight throughout the week. The store is slow between 10pm and midnight, so Melanie and Jack go home while a part-time sales associate, a university student, closes down the store. To close the store, the student puts all of the flowers in the fridge, cleans up and puts the cash from the register in the office safe.

Sales

About 50% of WCI customers arrange in advance for their flower arrangements for special occasions such as weddings, birthdays and client-appreciation events. Melanie is famous for her impeccable taste in flower creations, and some customers pre-order their arrangements as much as six months in advance. All customers are required to pay by cash when placing their order. Melanie makes daily deposits into WCIs bank account. She added up all deposits from October 1, 2015 to September 30, 2016 to arrive at the revenue figure for the year.

New corporate sales

Jack and Melanie are committed to continuously growing WCIs corporate events business; their goal is to be the preferred flower arrangement company in Toronto for major corporate events. WCI recently hired a new business development specialist, Charlie Penn. His main responsibilities are to visit different business and entertainment venues to promote the use of WCI for all of their special occasions. When Charlie isnt on the road, he works from home responding to emails and making calls.

Charlie was given a corporate credit card to use for any business related expenses, i.e. travel, meals and entertainment costs, as well as anything related to his home office, i.e. computer, desk and chairs, etc. Jack and Melanie also have corporate credit cards that they use to pay for WCIs operating expenses, including inventory purchases. All of the statements are received on the fifteenth of each month. Melanie immediately pays off the cards in full but does not have the time to review the statements in detail. When the credit card payments are made, Melanie records them in the accounting system.

Charlie was able to secure 20 new corporate accounts in the most recent fiscal year. It is customary in the flower arrangement business to invoice customers after the event and make the payment due 30 days after the event date. The corporate events have been very successful with several held in September, which is when people return from their summer vacations and begin hosting corporate events again. Melanie promptly sent out the invoices and recognized revenue for all 20 events held during the year. Seven event contracts have not yet been paid (three were held back in March and April). Melanie has not made any journal entries in relation to these events, even though she heard about setting up an allowance for doubtful accounts. She says: I know there are two methods but I didnt know what they are or which to choose so I left it so I wouldnt mess up the books.

Inventory

Inventory management is a critical part of running a flower shop. Melanie orders flowers every week, which arrive Mondays and Thursdays. Melanie believes that it is critical to offer a great variety of flowers in this tough competitive environment. While she has not been tracking which specific flowers, she has noticed that she ends up throwing out wilted chrysanthemums more than any other flower, even though they are supposed to last the longest about 20 days after being cut. As of September 30, WCI had 40 fresh chrysanthemums in the store.

WCIs main supplier, A2Z Flowers Inc (A2Z), provides a great variety of flowers, as well as other supplies such as pots, vases and baskets used in arrangements. A2Z charges a flat rate of $100 per delivery regardless of the size of the order. WCI has not invested in inventory management software that could help Melanie estimate how many flowers to buy. For now, she does her best to account for sales in both the slow and busy times (such as Valentines day, Mothers Day etc). A delivery can include as little as 50 flowers and 2 supply items (i.e. pots etc) and as much as 500 flowers and 50 items. When WCI receives an invoice for the delivery, Melanie pays by cheque and expenses the amount on the financial statements.

Financing

A Small Bank loans representative told Jack they would charge WCI an interest rate of 12% and would be interested in securing any collateral WCI might have. Jack is proud that a strategic real-estate investment he made on behalf of WCI two years ago is paying off. The market value of WCIs store and land is now $470,000, which is much higher than the original price of $250,000. Jack believes this asset will meet the banks collateral requirement. Jack asked Melanie to increase the value of the property to $470,000 on the balance sheet so that the bank can appreciate its value.

Sorry about the long question. But my main question is what are some issues involving this case