Question
Delicious Deliveries, Inc. (DDI) is a privately owned, Canadian startup that sells healthy snacks to individuals and businesses using a direct-delivery, subscription-based business model. Like
Delicious Deliveries, Inc. (DDI) is a privately owned, Canadian startup that sells healthy snacks to individuals and businesses using a direct-delivery, subscription-based 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.
EXHIBIT 1
Background Information
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 written-off any customer account balance in the fiscal year ended September 30, 2019.
EXHIBIT 2
Excerpts from DDIs Financial Statements and Accompanying Notes Delicious Deliveries, Inc. Income Statements For the Years Ended September 30 | ||
2019 | 2018 | |
Sales Revenue | 540,000 | 450,000 |
Cost of Goods Sold | 199,800 | 193,500 |
Gross Profit | 340,200 | 256,500 |
Expenses | ||
Salaries and Wages | 158,000 | 128,000 |
Rent, Selling, and Administrative | 105,000 | 85,000 |
Depreciation and Amortization | 25,000 | 25,000 |
Repairs and Maintenance | 1,000 | 500 |
Interest and Other | 900 | 1,420 |
Income before Income Taxes | 50,300 | 16,580 |
Provision for Income Taxes | 10,060 | 3,316 |
Net Income | $40,240 | $13,264 |
FYE September 30, 2019 | Salted/Seasoned | Fruit-Based | Baked Goods | Total |
Sales Revenue | $248,400 | $129,600 | $162,000 | $540,000 |
Cost of Goods Sold | 86,940 | 47,600 | 65,260 | 199,800 |
Gross Profit | 161,460 | 82,000 | 96,740 | 340,200 |
Average Shelf Life | 150 days | 120 days | 60 days |
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