Background information about the company WestPressed Ltd. is a privately-owned company with its headquarters in Edmonton, Alberta.
Question:
Background information about the company
WestPressed Ltd. is a privately-owned company with its headquarters in Edmonton, Alberta. Nick and Lena Shultz (a married couple) started the company seven years ago out of their basement. Nick has a marketing background and Lena has a background in graphic design. The concept started when Lena started creating clever sayings and logos that were unique to Edmonton and pressing the designs onto T-shirts. The designs became so popular that she started to expand her offerings to different types of clothing and accessories. They quickly realized that there was a unique niche in the market for products that are designed and made in Canada. They outgrew their basement space within one year, so they purchased some warehouse space in Edmonton where they store and produce all their products. The purchase was financed 70% with debt from the bank and the rest was financed with cash flows from the business. The debt is secured by the land and building they are currently using as their headquarters.
Over the years they have expanded to other Western provinces and cities, customizing their sayings and logos to each city. The market has responded very favorably, as people's buying preferences are shifting to want to support local businesses (even if this means paying a bit of a premium). People in Western Canada are also very proud of their home cities, so the concept has been incredibly successful. WestPressed is now a brand that is very well-known across Western Canada - from British Columbia to Manitoba. And, they are constantly looking at expanding into new markets. Nick and Lena quickly realized that the best way to make money and reduce risk was to be a manufacturer/wholesaler, not a retailer. So, all sales are made to small, medium-sized, and large retailers who then re-sell the products in their own stores. WestPressed does not sell to the end consumer. And, all products are made and shipped from Edmonton - WestPressed does not own any properties in any other city.
As business has expanded, so too has its workforce. Nick and Lena now have a staff of 30 (excluding themselves). There are 15 production staff, seven sales managers, three warehouse staff, one person in charge of payroll/human resources, and four people in accounting. They are all based in Edmonton. Nick and Lena pride themselves on sharing their success with all their employees. Sales managers are paid a base salary plus a 10% commission on all gross sales that they are responsible for, and all staff receive bonuses if sales targets are met for the fiscal year.
WestPressed's year end is December 31st. Sales for WestPressed are cyclical in nature; the busiest months are during the summer as well as the months leading up to the Christmas season. In 2019 (the prior year), WestPressed recorded $2.17 million in total sales and had a gross margin percentage of 40.54%.
It is now just after the 2020 fiscal year. WestPressed has had another incredibly successful year. Sales targets have again been exceeded. WestPressed realized in late 2019 that they could no longer run their business using QuickBooks (an off-the-shelf accounting software) so in early 2020 (when business was slower), they hired an outside consultant to convert their system to Oracle NetSuite. They chose this software because it met their needs for all the following major functions: sales, purchases, inventory management, payroll, and financial reporting. And, it is fully customizable so it can be customized to suit their needs as the business continues to grow. The conversion took 12 days in total (January 1st - 12th, 2020). Business was able to continue as usual during this period - production and sales both continued.
The consultant assured them that there would be no missing information when she was through. When the consultant first tested the system, she found a few glitches in the system where sales were being duplicated for some unknown reason. However, when she left on January 12th, she assured them that these glitches had been completely fixed.
Sales managers are responsible for their own customers. All products have standard prices, but sales managers can offer discounts for volume purchases at their discretion. The company uses the moving weighted average (MWA) costing method when recording cost of goods sold.
Although Nick and Lena understand how to make money, they do not have a background in accounting. They have hired the accounting staff to look after that side of the business, but they also recognize the importance of hiring an external party to come in to verify the information (particularly now that the business has grown so much). For the first time since the business has opened, they are hiring you, an external auditor, to come in to perform an audit of the financial statements for the fiscal year ending December 31, 2020.
Nick and Lena have told you that they would like some insights into which products and regions are performing the best/worst. They are also keenly interested in knowing about any other observations you have about their compensation policies and the system conversion this year. They regard you not only as their auditor, but also as their business advisor, so they are interested to hear about any recommendations you may have on how they could run their business more efficiently or effectively.
The accounting staff have provided you with some data on the company's sales for 2020 in a Microsoft Excel file. Here is a description of the information they have provided you with:
SALE_DATE - date the sale was recorded. Items are shipped FOB Shipping Point, so the buyer takes ownership as soon as the goods leave WestPressed's warehouse. It is therefore the buyer's responsibility to carry adequate insurance against potential losses for goods in transit.
PRODUCT - WestPressed currently offers 15 different products: backpacks, beanies, brimmed ball caps, cropped pants, fanny packs, lanyards, long-sleeved t-shirts, rain jackets, shorts, t-shirts, visors, watch straps, pants, socks, and hoodies.
SALES_AMT - gross amount of sale (the total amount charged to the customer, net of sales tax).
COGS_AMT - the cost of the inventory associated with each sale (using the MWA costing method).
SALES_REGION - WestPressed currently sells to ten regions throughout Western Canada: Brandon, Calgary, Edmonton, Kelowna, Red Deer, Regina, Prince Albert, Saskatoon, Vancouver, and Winnipeg.
SALES_MANAGER - the sales manager responsible for the sale. There are seven sales managers: Claire, Jack, Jenna, Karl, Matt, Mitch, and Sam.
Create a memo to the client highlighting some of your main areas of concern.
There should be a section on each of the following:
- Sales and average gross margin percentage by product
- Sales and average gross margin percentage by region
- Sales and average gross margin percentage by month
- Sales and average gross margin percentage by sales manager
- Other areas of concern/recommendations