Delicious Deliveries, Inc. (DDI) is a privately owned, Canadian startup company 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 on 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 nutritionistsand bakers convert these inputs into tasty products, which DDI then packages in 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 salesare 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 manufacturingindustrys 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-consciouspopulation in the Vancouver region. To finance this expansion, DDIs owners will bemeeting with potential investors and lenders next week. DDIs owners have asked foryour help in preparing for this meeting. DDI has never had an audit or any professionalaccountants advice, so you are being asked to assess whether DDIs accounting policiescomply 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, 2016. To prepare for the upcoming meeting, you draft a report toDDIs owners, identifying and explaining the financial reporting and accounting policy issues facing DDI. The owners have indicated they would prefer to discuss your viewsabout DDIs business strategy and operating plans at a later meeting, so you have beenasked 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

DDI customers place their orders through DDIs website. In addition to selectingsnacks 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 DDIsproduct lines is shown below for the fiscal year ended (FYE) September 30, 2016.

In addition to letting customers prioritize future product choices, DDIs websitecollects 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. Afterdescribing these uses of data at the Canadian Snack Food Associations annual convention, DDI was contacted by several companies interested in obtainingDDIs 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, 2016, as an intangible asset called Data Insights.

DDI has made a concerted effort to market to businesses near its head office, 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. Forexample, the hospitality staff at Torontos Downtown Marriott Hotel placeorders 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 2014 and 2015, but has not written-off any customer account balances in the fiscal year ended September 30, 2016.

FYE September 30, 2016	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

EXHIBIT 2 (continued) 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. Cost is 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 data are not amortized.

Note 2: Receivables

Accounts receivable Allowance for doubtful accounts Accounts receivable, net

Note 3: Inventories

Salted/seasoned snacks and raw materials Fruit-based snacks and raw materials Baked goods snacks and raw materials Total inventories

Note 4: Tangible assets

Equipment and other tangible assets, at cost Accumulated depreciation Equipment and other tangible assets, net

Note 5: Intangible assets

Website development Accumulated amortization Website development, net Data insights

Intangible assets

* * * end of case * * *4

Questions:

1. What are the key changes affecting Ddi this year? a. Who owns DDi? b. Who uses DDIs financial statements? c. What is significant about DDIs business relationship with its new user? 2. What are the big events to account for in 2014? a. How is the custom shirt business working out? b. What do we know about DDI s customer base? c. How is the new graphic design working out? d. What happened at the warehouse this year? 3. What is the revenue principle? At what point does ASPE indicate revenue should be recognized? 4. When does DDI report its revenue from custom orders? Under what circumstances would this be appropriate? 5. What alternative point in time exists for reporting revenue from custom orders? 6. What method do you think is best for recognizing revenue from custom shirts? What arguments support that method? 7. How would changing to this alternative method affect DDIs financial statements? How would changing to this alternative method affect DDIs current ratio? 8. At what value does ASPE require accounts receivable to be reported? 9. What method of accounting for bad debts does DDI use? When is this method okay? 10. Has anything changed this year to suggest this approach is no longer acceptable? What do learn from the number of days to collect receivables in 2014 versus 2013? 11. What alternative method could Ddi use for bad debts? Does any evidence suggest it is better? 12. What method of accounting for bad debts do you think Ddi should use? 13. How would changing to this alternative method affect DDis financial statements? How would changing to this alternative method affect Ddi s current ratio? 14. When does Ddi report sales returns? Under what circumstances is that method acceptable? 15. Have circumstances surrounding returns changed in 2014? How? 16. What does ASPE recommend under these new circumstances? 17. Should Ddi consider this alternative? Why? Are sales returns material to the key external user? 18. Which method of accounting for sales returns do you think is best? 19. How would changing to this alternative method affect DDis financial statements? How would changing to this alternative method affect DDis current ratio? 20. Using what measurement does ASPE require inventory to be reported? 21. Using what measurement has Ddi been reporting its inventory? When is this appropriate? 22. Has anything changed this year to suggest this approach is no longer acceptable? What do you learn from the number of days to sell inventory in 2014 versus 2013? 23. Is there any evidence to suggest that Ddi will have to markdown its selling price below cost? What does the gross profit percentage in 2014 indicate about the margin of difference between selling price and cost? 24. What do you think DDI should do when reporting its inventory of graphic shirts? 25. How would changing to the alternative method affect DDis financial statements? How would changing to this alternative method affect DDis current ratio? 26. If all the proposed changes were made, how would DDis current ratio change? 27. How much additional equity would Nicki need to contribute to return Ddi to a current ratio of 1.0? 28. What next steps would you recommend for Nicki?