Case Study Rhys Fries

Part 1

May 1, 20X1

Ronald Rhy is the head fry cook and bottle washer at a local chain restaurant. Although his choice of career hasnt been the most financially rewarding he has always had a passion for providing great food to customers. His specialty dish is the triple fried Belgian style fries with his secret seasonings. Lately the tedium of his position is starting to wear on him and he finds himself thinking about leaving the organization to start his own business. He even has a name picked out; Rhys Fries. He is hesitant to take the plunge and leave the security of his current job but a recent advertisment he saw about an upcoming event; The LadLard Food Fair has him very intrigued. He feels this is could be an excellent way to see if venturing out on his own can work.

The LadLard Food Fair is a two day convention that takes place May 29 and 30, 20X1. The event allows deep fry masters to showcase their skills and sell food to swarms of hungry customers. For a one time fee, vendors get access to a booth and are provided with cooking oil, disposable plates and cutlery for patrons. The food or any other products they wish to sell are not provided. Vendors can bring in their own equipment or rent a deep fryer for an additonal fee.

The fee for the convention is $2,000 plus an additional $300 for the deep fryer rental but Ronald is currently short on cash. He is able to put $2,600 of his own cash into the business but will have to borrow the remainder from a family member. He also will have to borrow money to buy the potatoes he needs for his fries. Ronald is unsure how big this event will be but estimates that he will need 45 bags of potatoes (each bag costs $50). To cover off these costs as well as have a small contingency fund he will need to borrow $4,900 from his family.

Ronald approached his uncle Bob for a loan as well as some advice as Bob is a CPA and has been running a successful accounting firm for many years. Bob provides the $4,900 loan to Ronald and provides some free accounting advice; Keep all your receipts and keep track of everything because this is now a business. Bob also tells Ronald to register the business as a corporation, as it can help limit the personal liability in case something happens. Ronald takes the loan from Bob, immediately pays the fees (entrance and deep fryer) and then buys the potatoes he needs. He also went to city hall and registered his business as Rhys Fries Inc. a private corporation where he is the primary shareholder. The business registration cost $350 and hes declared that the fiscal year for this organization will run from May 1^st to April 30^th.

1a) Complete any journal entries required for Rhys Fries up to this point. Assume inventory is FIFO costing under a perpetual inventory system.

1b) Create T-accounts for the accounts used and show the ending balance of each account after journalizing the transactions from (1a) above.

Rhys Fries Part 2

May 31, 20X1

The convention was a huge success! Ronalds booth was extremely popular and drew attention from local media and food bloggers. This unexpected boost provided a near non stop flow of customers to his booth. It was hard work but it paid off.

At the end of the convention, Ronald added up all of his sales tickets and was pleased with the results. He had total cash receipts of $9,450 (this included GST on the sales of $450) but he didnt read all of the fine print in the convention contract he signed. He found out at the end of the event that there was a cleanup and oil disposal fee charged for every barrel of oil used. The fee was $80 (plus GST) per barrel and Ronald used 5 barrels of oil over the course of the weekend. He used the cash he generated from sales to pay the cleanup fee at the end of the convention. He also had 4 bags of potatoes left that he is going to keep in storage.

2.) Complete any journal entries required for these events?

Hint: It may be a good idea to keep updating the T-accounts for the accounts used.

Case Study

Rhys Fries Part 3

June 1, 20X1

After the success of his first convention Ronald starts to wonder if he can make this business become his career. He is confident in his abilities but isnt really sure where to go next. A patron from the LadLard event mentioned to him during the show that there is a bigger and more prestigious event coming up at the end of the month; the Oilmaggedon. This 5 day outdoor event (June 20-24) brings together hundreds of vendors and many thousands of hungry patrons. On top of that there are often cooking celebrities and famous food critics wandering around. Ronald is convinced this is the exposure he needs to give his business a boost. However, the event only has a limited amount of spots and its only for those with food trucks.

A bigger event also means higher entrance fees. The cost to get a spot at Oilmaggedon is $3,700. There are no options to rent a deep fryer and no amenities are provided. Ronald decides its worth the risk. He quits his job to dedicate his full attention to Rhys Fries.

June 5, 20X1

His first task is to find a suitable food truck. Luckily, he noticed at the end of the LadLard convention that a fellow vendor had a FOR SALE sign on his food truck. The vendor was asking $14,000 for the truck but Ronald was able to negotiate him down to $13,200. Its a used truck, but Ronald estimates it has a remaining useful life of 4 years (straight line depreciation). To purchase the truck he put down $1,200 cash and took out a secured loan from the bank for the remainder. The loan is a one year loan with a 6% interest rate. The loan is a fixed principle plus interest loan and the first installment is due on June 30. After picking up the food truck he pays the $3,700 entry fee. Ronald also purchases and pays the required insurance for the truck that cost $1,140 for the year.

June 18, 20X1

Two days before the event starts Ronald takes out a short term business operating loan from a local short term lending firm for $6,600. The loan is due in full by June 30, 20X1 and has a $500 interest charge due upon payment. Then he heads over to the local mega-mart to buy 100 bags of potatoes at $42 per bag, 20 pails of oil at $30 per pail and $450 worth of amenities (plates, napkins, and utensils).

3.) Complete any required journal entries for these events.

Hint: Consider the amenities and oil to be supplies and not inventory.

Case Study

Rhys Fries Part 4

June 30, 20X1

Oilmaggedon was another success for Rhys Fries but not without some significant challenges. The event showcased how popular Ronalds product was as he brought in $23,625 (including GST of $1,125) in cash receipts but it could have been higher. He sold 3,750 servings of food but underestimated how far his inventory would go and ran out of potatoes part way through the last day. He had 5 pails of oil left and $30 worth of amenities at the end of the 5^th day. He also needed to hire a temporary helper to handle the demanding prep and cleanup work. The assistant worked 5 hours a day for each of the 5 days. The employee was hired through a local hiring agency at a rate of $20 per hour and the total wages for the employee are due to the hiring agency 15 days after the end of the event.

The biggest challenge was with his food truck however. Being unfamiliar with the equipment proved to be a costly error. After the first day Ronald left some of his equipment running overnight causing it to overheat and breakdown. The mistake resulted in $1,800 worth of repairs. He paid for the repairs using the cash generated from the first day of the sales.

Since he had no product left to sell for part of the last day, he took some time to check out what offerings the other vendors had. He noticed a several things during his wandering. One was that his selling price seemed to be lower than many other competitors and also most vendors offered several different products and product variations rather than just the single option offered at Rhys Fries. He wondered if it would have perhaps been more profitable to sell fewer servings but at a higher price?

Having now rested and recovered, Ronald took the cash generated from the event and repaid the short term operating loan, the loan from Bob and made the first installment payment on the food truck loan. He also took his food truck to a local mechanic to get some routine maintenance completed so that he can avoid any unnecessary repairs at future events. The maintenance costs were $1,500 plus GST and were completed and paid with cash on June 30.

4.) Complete any journal entries required up to June 30, 20X1 including any adjusting entries needed. Assume a full month of insurance, interest, and depreciation for the food truck.

Case Study

Rhys Fries Part 5

July 2, 20X1

After seeing an advertisement on a local billboard about an upcoming county carnival Ronald got an idea about what to do next. Hell take his food truck on the summer carnival circuit. Hes done some basic research and estimates that he will be able to attend at least 10 different events between now and the end of September. He knows this will be difficult work, more difficult than he can do on his own, so he sets out to find some help.

On July 4^th, he posted a help wanted ad on a local job website. The cost for the ad was $100 plus GST for a weekend posting (paid by cash). The response wasnt overly great, but he did find a passionate and experienced individual that knows the carnival circuit; Peter Crandle. Ronald has agreed to pay Peter a $4,300 per month salary as well as cover off any necessary travel expenses that come up during their tour of the circuit. Peter starts work on July 8^th but because of the short notice Ronald has agreed to pay Peter his full monthly salary for the month of July (payment date of July 31). Ronald also paid the hiring agency the amounts owing from the worker required for Oilmaggedon.

July 12, 20X1

The adventure begins! Having only a couple of days to prepare, Ronald and Peter get set to begin their tour of the carnival circuit. Though feeling a little unprepared for the challenges that may lie ahead Ronald soothed his nerves with an informative conversation with Uncle Bob who provided a handy spreadsheet to help keep track of the revenues and expenses. The spreadsheet allows Ronald to list out the dates and locations of his sales as well as the related expenses for those events. Bob told Ronald to come back at the end of the month to get his financial statements prepared.

July 31, 20X1

Its been a whirlwind couple of weeks for Ronald and Peter. Though there were many long days of selling followed by even longer nights travelling to the next destination, Ronald did manage to find time to complete the spreadsheet that Bob gave him (Appendix 1). With the spreadsheet in hand, Ronald went to see his uncle. He also declared and paid himself a dividend of $3,800 for his hard work over the past couple of months.

5a.) Complete any journal and adjusting entries required for the month of July 20X1. Be sure to include the journal entries required from Appendix 1.

5b.) Using the year to date balances in the various accounts utilized up to this point, complete an adjusted trial balance, multi-step income statement, statement of changes in equity and statement of financial position for the quarter ended July 31, 20X1.

Case Study

Rhys Fries Part 6

September 30, 20X1

Its been a crazy ride for Ronald and Rhys Fries. He and Peter travelled around the carnival circuit all summer and into early fall stopping at every fair, exhibition, convention, carnival and rodeo they could make it to. Some locations were better than others, and there were some minor issues including a few truck breakdowns, inventory spoilage and some wrong turns that they had to contend with, but overall it was a successful season. Ronald was also surprised to discover how popular his new product was; poutine.

It was so popular that Ronald has decided to pursue this as the next avenue in this business; a fry and poutine restaurant. There is a perfect, high traffic location that is available to buy but a restaurant is completely different than a food truck and hes a little unsure about what its going to take to make it work. The location was previously a clothing retail store, and as such its going to require some extensive renovations to turn it into a functioning restaurant. On top of that, it will need kitchen equipment (deep fryers, stoves, cooking utensils, etc.) as well as tables, chairs and other restaurant amenities before it would be able to open.

Alternatively there is a less desirable location that is available to lease. The location is in an older area of the city and was previously a restaurant. It has old, but still functioning equipment (deep fryer, stove, cooler, ovens etc.) though its unclear how long the equipment will last. The lessor has also indicated that any of the restaurant amenities (tables, chairs, utensils, etc.) that are on the property can be purchased at a deeply discounted rate. The restaurant itself is in good shape and aside from a thorough cleaning wont require a lot of work to get it open.

Ronald once again seeks out the advice of Uncle Bob to get some clarity on the potential risks and advantages of each option (Lease vs Buy). He also wants to get some more information about something he recalls Bob talking about at a previous meeting; Internal Controls.

6a.) As Bob, what would you tell Ronald regarding the two options (Lease or Buy)?

6b.) What are some of the important internal controls that Ronald will have to consider and implement in this situation regardless of which option is chosen?

Notes

tems that include GST will be noted. The GST rate for those items will be 5%. For all other items assume there are no GST impacts.

Appendix 1 - Sales, Cost of Sales and Expenses related to July 14 July 29, 20X1 Date July 14 July 18 July 23 July 29 City Springfield Shelbyville Capital City Ogdenville $ $ I $ $ GST on Sales Sales 14,723 $ 736 12,568 | $ 628 19,523 $ 976 6,854 $ 343 Total Cash Inventory | Cost of | Travel | Ending Receipts Purchases Sales Expenses | Inventory* $ 15,459 | $ 6,000 $ 5,595 $ 1,240 $ 405 $ 13,196 $ 4,500 $ 4,524 | $ 805 $ 381 $ 20,499 $ 7,600 $ 7,809 $ 1,920 $ 172 $ 7,197 $ 1,953 $ 2,125 $ 365 $ (0) *Ending inventory refers to the balance of inventory at the end of the event. Note: Assume all inventory purchases and travel expenses were paid in cash. Appendix 2 - Accounts Receivable aging as at January 31, 20X3 Estimated % Uncollectible 2% 4% Number of Days Outstanding 0-30 31-60 61-90 91-120 Over 120 TOTAL Accounts Receivable $ 36,500 $ 12,500 $ 9,250 $ 4,200 $ 2,750 $ 65,200 10% 15% Appendix 1 - Sales, Cost of Sales and Expenses related to July 14 July 29, 20X1 Date July 14 July 18 July 23 July 29 City Springfield Shelbyville Capital City Ogdenville $ $ I $ $ GST on Sales Sales 14,723 $ 736 12,568 | $ 628 19,523 $ 976 6,854 $ 343 Total Cash Inventory | Cost of | Travel | Ending Receipts Purchases Sales Expenses | Inventory* $ 15,459 | $ 6,000 $ 5,595 $ 1,240 $ 405 $ 13,196 $ 4,500 $ 4,524 | $ 805 $ 381 $ 20,499 $ 7,600 $ 7,809 $ 1,920 $ 172 $ 7,197 $ 1,953 $ 2,125 $ 365 $ (0) *Ending inventory refers to the balance of inventory at the end of the event. Note: Assume all inventory purchases and travel expenses were paid in cash. Appendix 2 - Accounts Receivable aging as at January 31, 20X3 Estimated % Uncollectible 2% 4% Number of Days Outstanding 0-30 31-60 61-90 91-120 Over 120 TOTAL Accounts Receivable $ 36,500 $ 12,500 $ 9,250 $ 4,200 $ 2,750 $ 65,200 10% 15%