Dr. Aman Owen is CEO of Tera 13 Medicines Inc., a company which manufactures pharmaceutical products and distributes them across North America. As Dr. Aman 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. Tera 13 Medicines produces several types of pharmaceutical drugs from advil, ibuprofen to Covid doses. It has two business units, one for General Drugs (medicines) and the premium Covid Doses business unit. Aman 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, Aman and his management team discussed some of the current financial results of the company. Tera 13 Medicine Industry Average Profitability Profit margin (%) 9.9 11.3 Return on total assets (%) 8.8 10.2 Return on equity 9 13 Capital structure Non-current to current assets (%) 86 101 Debt ratio (%) 47 65 Interest earned (times) 23 12 Efficiency Inventory turnover (times) 3 5.5 Average collection period (days) 38 28 Non-current asset turnover (times) 2.5 3.2 Liquidity Current ratio (times) 2.4 1.8 Quick ratio (times) 1.8 1.2 Here are the scripts from the management meeting: Concerns were raised by the factorys 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 havent had time to make sense of it but take a look here. 2024 2023 2022 Cash- year end $246,000 $325,000 $322,000 Operating expenses- annual 1,150,000 1,220,000 1,200,000 Accounts payable- year end 42,500 48,500 41,500 Sales revenues- annual 1,620,000 1,650,000 1,600,000 Accounts receivable- year end 53,000 40,000 44,000 The Sales Manager takes a quick look at the data and says, Im 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! Aman weighs what the Sales Manager is saying and quickly interjects with a gesture to the General Manager. She did mention the numbers havent 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." Aman 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 businesss 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. Aman wants a detailed analysis of this, too. The Sales Manager interjected. The lower revenues arent my fault! Customers are not paying quickly and that messes up my numbers! Its ok, I will look into that. Aman 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? Aman turned to the Human Resources Manager who had been quiet throughout the meeting. She sighed. Theyre going- we should probably project a 10% increase salary expenses next year- theyre playing hardball because of the high inflationary environment right now! Aman 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 firms 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 Covid doses business unit- how is that going? He frowned. We dont have exact profit numbers yet since we get special orders over there and we are having trouble tracking costs of those orders. Aman 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. Aman 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, Aman ended the meeting and called you, an MBA with accounting expertise, to help him.