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

Averag

e

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