Case 2-1You led a group of investors in purchasing Zodiak, Inc. from its founder and namesake at the beginning of 2013. You financed the $40 million acquisition of this manufacturer of quality industrial components with equal amounts of equity and debt capital. Your investment team provided the majority of owner financing, and other investors purchased stock to supplement your groups equity infusion. A $20 million, 6% loan from the First National Bank financed the remainder of the purchase.You resigned as chief executive officer (CEO) after the firms fourth fiscal year, which ended on December 31, 2016, in order to pursue other business opportunities. You continued in your capacity as chair of Zodiaks Board of Directors (BOD). The BOD elected Johannes Skilling as CEO, effective January 1, 2017, over your objections. Mr. Skilling had a proven record of accomplishment as an executive and demonstrated strong interpersonal skill during the search process; yet, you had an uneasy feeling about him. Specifically, you felt that Skilling took too many unnecessary risks and pushed the envelope too far with overly aggressive financial reporting practices. Although Mr. Skilling was thoroughly vetted, you had off the record conversations with trusted busi- ness colleagues who echoed your concerns. None was willing, however, to speak on the record. In the end, you acquiesced to the unanimous wish of the rest of the board and ratified the hiring of Mr. Skilling as CEO effective January 1, 2017.

Financial Statements

Zodiaks financial performance during your tenure as CEO was solid, if not spectacular. Corporate profitability ostensibly soared under Skillings tutelage in 2017. The accompa- nying spreadsheet contains the annual income statements for the last three fiscal years, as well as the last two periods balance sheets. The financial data clearly evidence the superior results Zodiak achieved in 2017, which was the first year that Skilling served as CEO. (This problem ignores income taxes.)

(This problem ignores income taxes.)

Required

For part one, use the spreadsheet. Part two is a written executive summary/memorandum that should be addressed to the board of directors. Have a subject and address the issues in the assignment.

Case 2-1 Spreadsheet Template - Zodiak, Inc. Statements as Originally Presented Income Statements For the Years Ended December 31 (in thousands) Sales revenues Cost of goods sold As Recast 2017 Adjustments 2017 2016 2015 35,735 $ 31,906$ 30,100 12,840 17,260 8,025 625 700 7,910 1,200 $8,719 7,275$ 6,710 15,241 20,494 9,270 645 660 9,919 1,200 13,608 18,298 8,427 640 756 8,475 1,200 Gross profit Selling, general, and administrative expenses Depreciation expense Research and development expense Operating income Interest expense Net income Balance Sheets As Recast 2017 As Presented 2017 December 31 (in thousands) Adjustments 2016 Assets Cash Accounts receivable Inventory Other current assets $5,728$ 2,123 6,282 4,531 134 13,070 7,047 5,812 1,649 20,236 Current assets Property, plant, and equipment 33,067 34,737 $ 53,303$ 47,807 Total Assets Liabilities Accounts payable Accrued liabilities 4,253 3,402 846 4,248 889 Current liabilities 5,142 20,000 24,248 Notes payable 20,000 25,142 Total Liabilites Shareholders' Equit 20,000 3,559 23,559 $ 53,303$ 47,807 20,000 8,161 28,161 Common stock Retained earnings Total shareholders' equty Total Liabilities and Shareholders' Equity