Delicious Deliveries, Inc. (DDI) is a privately owned, Canadian startup that sells healthy snacks to individuals and businesses using a direct-delivery, subscriptionbased business model. Like NatureBox in the U.S., DDI delivers boxes of snacks to Canadians each month at home or at work, based on selections they make at DDIs website. DDI offers a menu of more than 30 snack products that DDI produces itself, representing three categories: salted/seasoned (e.g., nuts, seeds, pulses, roots), fruit-based snacks (e.g., dried fruits, fruit chews, fruit peels), and baked goods (e.g., jam cookies, lemon biscuits, yogurt-infused cake pops).

DDI rents its head office and production facilities in southwestern Ontario. DDI sources its raw materials from local agricultural producers and nearby mills. DDIs nutritionists and bakers convert these inputs into tasty products, which DDI then packages and sends as snack boxes to customers across the country via Canada Post. For home deliveries, customers are required to pay at the time they place their order. These sales occur evenly throughout the year. Customers with a business address buy on account with payment expected 30 days after each months delivery. About 70% of DDIs sales are made on account.

From the beginning, DDI has had great success, reporting slightly more than $6,000 of net income during its first year of operations. Its profits in the most recent two years have continued to increase, helped in part by steady growth in the snack food industry as a whole. According to Statistics Canada, the Canadian snack food manufacturing industrys sales revenue has increased 83% over the past decade and its gross profit has recently been growing at a rate of 5.5% per year. Gross margins now average 59 percent of sales for the typical snack food company.

The owners of DDI would like to expand the companys production and operations into B.C., to take advantage of its local fruit production as well as its large, health-conscious population in the Vancouver region. To finance this expansion, DDIs owners will be meeting with potential investors and lenders next week. DDIs owners have asked for your help in preparing for this meeting. DDI has never had an audit or any professional accountants advice, so you are being asked to assess whether DDIs accounting policies comply with Canadian accounting standards for private enterprises (ASPE). To inform your evaluation, you have been provided background information (Exhibit 1) and excerpts from DDIs financial statements and accompanying notes (Exhibit 2).

It is now October 15, 2019. To prepare for the upcoming meeting, you draft a report to DDIs owners, identifying and explaining the financial reporting and accounting policy issues facing DDI. The owners have indicated they would prefer to discuss your views about DDIs business strategy and operating plans at a later meeting, so you have been asked to exclude such matters from your current report. Rather, your goal is to present the rationale and evidence that suggests DDI will need to adjust its financial statements before presenting them to potential investors and lenders. Prepare the report.

Background Information

Exhibit 1

1. DDI customers place their orders through DDIs website. In addition to selecting snacks for delivery in the upcoming month(s), customers can prioritize up to 20 items for future orders. This additional information helps DDI manage inventory levels, which is important to DDI to enhance customer satisfaction as well as ensure product safety. The baked goods line, in particular, is susceptible to food safety issues because these goods have an average shelf life of only 60 days, after which the baked goods must be destroyed. Information about each of DDIs product lines is shown below for the fiscal year ended (FYE) September 30, 2019.

2. In addition to letting customers prioritize future product choices, DDIs website collects customer ratings and comments about existing product attributes to help DDI identify the features that make its products attractive. This information is used by DDI when developing new product recipes. These data also are used when selecting the particular words DDI uses to market its products. After describing these uses of data at the Canadian Snack Food Associations annual convention, DDI was contacted by several companies interested in obtaining DDIs customer ratings information. DDI has not yet committed to releasing this information, but now knowing a potential market exists for the data, DDI has capitalized $50,000 of its regular website operating costs for the fiscal year ended September 30, 2019, as an intangible asset called Data Insights.

3. DDI has made a concerted effort to market to businesses in its region, and has succeeded in increasing its deliveries to corporate addresses. Collections from these customers has lagged though because most business customers are actually individual employees or groups of employees within a business. For example, the hospitality staff at Torontos Downtown Marriott Hotel place orders for delivery to the hotel but these deliveries are billed to the hospitality staff rather than to the Marriott Hotel itself. Collecting from employee groups is proving much more difficult than collecting from typical corporate accounting departments. DDIs management continues to be optimistic that these problems will be resolved. Its managers have indicated that DDI had written-off several customer accounts in fiscal 2017 and 2018, but has not writtenoff any customer account balance in the fiscal year ended September 30, 2019.

Exhibit 1:

EXHIBIT 2

Excerpts from DDIs Financial Statements and Accompanying Notes

Note 1: Significant Accounting Policies Revenue Recognition

The Company earns revenue from two customer groups. Sales of snack boxes to customers at business addresses are recorded at the time of delivery when an order is filled. Sales of snack boxes to consumers at residential addresses are recorded at the time an order and payment is received online. Receivables The Company accounts for receivables using the allowance method, with doubtful accounts estimated using the percentage of credit sales method. Inventories The Company reports its inventories of packaged snacks and the raw materials used in packaged snacks at the lower of cost and net realizable value. Costis determined using the first-in, first-out (FIFO) method. Netrealizable value is estimated using judgment informed by historical selling prices and projected demand. Tangible and Intangible Assets The Company reports equipment and other tangible assets at cost, and depreciates this cost (net of estimated residual value) on a straight-line basis over ten years. Intangible assets consist of initial website development costs, which are amortized straight-line over three years; data insights derived from website data are not amortized.

Your answer should consist of a written analysis, and any appended tables/embedded spreadsheets. Prepare your report.

FYE September 30, 2019 Sales Revenue Cost of Goods Sold Gross Profit Salted/Seasoned $248,400 86,940 161,460 Fruit-Based Baked Goods $129,600 $162,000 47,600 65,260 82,000 96,740 Total $540,000 | 199,800 340,200 Average Shelf Life 150 days 120 days 60 days Delicious Deliveries, Inc. Income Statements For the Years Ended September 30 2019 540,000 199.800 340,200 2018 450,000 193,500 256,500 Sales Revenue Cost of Goods Sold Gross Profit Expenses Salaries and Wages Rent, Selling, and Administrative Depreciation and Amortization Repairs and Maintenance Interest and Other Income before Income Taxes Provision for Income Taxes Net Income 128,000 85,000 25,000 500 158,000 105,000 25,000 1,000 900 50,300 10,060 $40,240 1,420 16,580 3,316 $13,264 Delicious Deliveries, Inc. Balance Sheets At September 30 2019 2018 2017 Assets Current Assets: Cash and Cash Equivalents Accounts Receivable (Note 2) Inventories (Note 3) Total Current Assets Tangible Assets (Note 4) Intangible Assets (Note 5) Total Assets $ 3,978 49,731 43,604 97,313 70,000 60,000 $227,313 $ 3,000 32,795 40,060 75,855 80,000 - 25.000 $180,855 $ 1,000 15,600 34,459 51,059 90,000 40.000 $181,059 $ 48,710 $39,871 0 100 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable Unearned Revenue Income Taxes Payable Total Current Liabilities Note Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities & Shareholders' Equity 10,060 58,770 54,000 112,770 $ 42,401 100 3,316 45,817 60,735 106,552 2,200 42,171 77,849 120,020 55,000 59,543 114,543 $227,313 55,000 19,303 74.303 $180,855 55,000 6,039 61,039 $181,059 Note 2: Receivables Accounts receivable Allowance for doubtful accounts Accounts receivable, net 2019 $49,841 (110) $49.731 2018 $32,905 (110) $32.795 2017 $15,706 (106) $15.600 Note 3: Inventories Salted/seasoned snacks and raw materials Fruit-based snacks and raw materials Baked goods snacks and raw materials Total inventories 2019 $23,587 8,835 11,182 $43,604 2018 $21,669 8,117 10,274 $ 40,060 2018 $100,000 (20,000) $ 80.000 2017 $18,639 6,982 8,838 $ 34,459 Note 4: Tangible assets Equipment and other tangible assets, at cost Accumulated depreciation Equipment and other tangible assets, net 2019 $100,000 (30,000) $70.000 2017 $100,000 (10,000) $90.000 Note 5: Intangible assets Website development Accumulated amortization Website development, net Data insights Intangible assets 2019 $45,000 (35,000) 10,000 50,000 $ 60.000 2018 $45,000 (20.000) 25,000 2017 $45,000 (5,000) 40,000 $25.000 $ 40.000 FYE September 30, 2019 Sales Revenue Cost of Goods Sold Gross Profit Salted/Seasoned $248,400 86,940 161,460 Fruit-Based Baked Goods $129,600 $162,000 47,600 65,260 82,000 96,740 Total $540,000 | 199,800 340,200 Average Shelf Life 150 days 120 days 60 days Delicious Deliveries, Inc. Income Statements For the Years Ended September 30 2019 540,000 199.800 340,200 2018 450,000 193,500 256,500 Sales Revenue Cost of Goods Sold Gross Profit Expenses Salaries and Wages Rent, Selling, and Administrative Depreciation and Amortization Repairs and Maintenance Interest and Other Income before Income Taxes Provision for Income Taxes Net Income 128,000 85,000 25,000 500 158,000 105,000 25,000 1,000 900 50,300 10,060 $40,240 1,420 16,580 3,316 $13,264 Delicious Deliveries, Inc. Balance Sheets At September 30 2019 2018 2017 Assets Current Assets: Cash and Cash Equivalents Accounts Receivable (Note 2) Inventories (Note 3) Total Current Assets Tangible Assets (Note 4) Intangible Assets (Note 5) Total Assets $ 3,978 49,731 43,604 97,313 70,000 60,000 $227,313 $ 3,000 32,795 40,060 75,855 80,000 - 25.000 $180,855 $ 1,000 15,600 34,459 51,059 90,000 40.000 $181,059 $ 48,710 $39,871 0 100 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable Unearned Revenue Income Taxes Payable Total Current Liabilities Note Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities & Shareholders' Equity 10,060 58,770 54,000 112,770 $ 42,401 100 3,316 45,817 60,735 106,552 2,200 42,171 77,849 120,020 55,000 59,543 114,543 $227,313 55,000 19,303 74.303 $180,855 55,000 6,039 61,039 $181,059 Note 2: Receivables Accounts receivable Allowance for doubtful accounts Accounts receivable, net 2019 $49,841 (110) $49.731 2018 $32,905 (110) $32.795 2017 $15,706 (106) $15.600 Note 3: Inventories Salted/seasoned snacks and raw materials Fruit-based snacks and raw materials Baked goods snacks and raw materials Total inventories 2019 $23,587 8,835 11,182 $43,604 2018 $21,669 8,117 10,274 $ 40,060 2018 $100,000 (20,000) $ 80.000 2017 $18,639 6,982 8,838 $ 34,459 Note 4: Tangible assets Equipment and other tangible assets, at cost Accumulated depreciation Equipment and other tangible assets, net 2019 $100,000 (30,000) $70.000 2017 $100,000 (10,000) $90.000 Note 5: Intangible assets Website development Accumulated amortization Website development, net Data insights Intangible assets 2019 $45,000 (35,000) 10,000 50,000 $ 60.000 2018 $45,000 (20.000) 25,000 2017 $45,000 (5,000) 40,000 $25.000 $ 40.000