ChessPerfect Case: Part A Jastu Trudao is a chess enthusiast and CEO of ChessPerfect, a company which manufactures chess sets and distributes them across North America. As Jastu purchased a majority stake in the business recently and took over the CEO role, he is still seeking some help with fully understanding the business. ChessPerfect produces several types of chess sets from vinyl to titan materials. It has two business units, one vinyl and the premium Titan business unit. Jastu has strong manufacturing plants and a great team of management including a general manager, sales manager, production manager and HR manager. He wishes to get advice, amongst other things, on running an ethical business $($including accounting$-$specific elements$).$ In the most recent management meeting, Jastu and his management team discussed some of the current financial results of the company. Chess Perfect Industry Average Profitability Profit margin $(\%)9\mathrm{.}811\mathrm{.}2$ Return on total assets $(\%)8\mathrm{.}710\mathrm{.}1$ Return on equity $913$ Capital structure Non$-$current to current assets $(\%)86101$ Debt ratio $(\%)4765$ Interest earned $($times$)2312$ Efficiency Inventory turnover $($times$)35\mathrm{.}5$ Average collection period $($days$)3828$ Non$-$current asset turnover $($times$)2\mathrm{.}43\mathrm{.}1$ Liquidity Current ratio $($times$)2\mathrm{.}31\mathrm{.}6$ Quick ratio $($times$)1\mathrm{.}71\mathrm{.}1$ Here are the scripts from the management meeting: Concerns were raised by the factory$$s Production Manager, who is known for his practical approach. $$This ratio business doesn't appeal to me at all. You can never be sure that the figures are prepared consistently on the same basis. I prefer looking at the absolute amount, which is much more useful, in my opinion.$$ The General Manager, who is patient and open to different viewpoints, "Thank you and we know your views, and we certainly need to see how they hold up over a number of accounting periods, not just one." She placed a paper on the table. $$These are the numbers I received this morning$-$ the $2024$ numbers are not official yet as they still need to be verified and the data is a bit messy. I haven$$t had time to make sense of it but take a look here.$202420232022$ Cash$-$ year end $$245,000$ $$324,000$ $$321,000$ Operating expenses$-$ annual $1,150,0001,220,0001,200,000$ Accounts payable$-$ year end $42,00048,00041,000$ Sales revenues$-$ annual $1,620,0001,650,0001,600,000$ Accounts receivable$-$ year end $53,00040,00044,000$ The Sales Manager takes a quick look at the data and says, $$I$$m not an accountant but it seems to me that there might be a mistake with the numbers which impact profit$-$ either the numbers on the paper are wrong or the ratio calculation is$!$ Jastu weighs what the Sales Manager is saying and quickly interjects with a gesture to the General Manager. $$She did mention the numbers haven$$t been verified yet, but we can dig deeper into that.$$ He makes a quick mental note to confirm how net profit is calculated and if the profit margin ratio makes sense. He wonders if there are other expenses to consider, not just operating expenses. The Production Manager took a quick look at the paper and said, $"$It seems like our revenues are trending down, which, of course, means lower profits. And remember that we also pay our shareholders as good a dividend as any of our competitors, if not better." Jastu recalls that the company paid about $40\%$ of it profits as dividends last year. He has held off on declaring dividends this year, but wants a pros and cons analysis on paying dividends. He wonders how the business$$s cash situation would be affected if the corporation stuck to its usual policy of paying out $40\%$ of profits to shareholders. The company typically waited until supplier bills came due before paying$-$ what if they delayed paying? That could certainly help the cash situation, but there could certainly be downsides to an act like that. Jastu wants a detailed analysis of this, too. The Sales Manager interjected. $$The lower revenues aren$$t my fault! Customers are not paying quickly and that messes up my numbers!$$It$$s ok$,$ I will look into that.$$ Jastu makes a mental note to inquire about the impact of unpaid invoices on sales revenue and to seek recommendations on how to entice customers to pay more quickly. He is wondering if there might be drawbacks to requesting quicker payments. $$How are union negotiations going?$$ Jastu turned to the Human Resources Manager who had been quiet throughout the meeting. She sighed. $$They$$re going$-$ we should probably project a $10\%$ increase salary expenses next year$-$ they$$re playing hardball because of the high inflationary environment right now!$$ Jastu chewed his lip and refrained from asking if firing some of the louder employees was a good way to send a message$-$ perhaps that would limit raises to only $5\%.$ As it stood now, he was expecting sales to remain flat next year and operating expenses to increase $8\%$ overall. What would that do to the firm$$s bottom line? He made another mental note to ask for help with the projection and perhaps his negotiation strategy too. Wisely, he steered the conversation in a new direction, turning to the Production Manager. $$So$,$ our new premium Titan business unit$-$ how is that going?$$ He frowned. $$We don$$t have exact profit numbers yet since we get special orders over there and we are having trouble tracking costs of those orders.$$ Jastu nodded. $$OK$,$ so we need a proper costing system for specific jobs.$$ He had a suspicion that there were issues in the premium Titan department and had planned to ask his cost accountant friend about it$,$ but she was away on a vacation at the moment. Jastu would need to seek help elsewhere$-$ the business was getting a lot of special orders and tracking and recording costs of each order accurately was imperative. Specifically, he needed advice on allocating manufacturing overhead costs and making journal entries$-$ detailed examples of both would really help. With so much to think about, Jastu ended the meeting and called you, an MBA with accounting expertise, to help him.