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Question: Deal More Save More Limited ( DMSM ) is a chain of retail stores across Canada. DMSM sells a wide range of kitchen and

Question:
Deal More Save More Limited
(
DMSM
)
is a chain of retail stores across Canada. DMSM sells a wide
range of kitchen and hardware items, cleaning supplies, snacks and seasonal items that it obtains from
major manufacturers and wholesalers. DMSM
'
s strategy has long been to deliver consumer value and
convenience by offering everyday name brand products with low prices and good value in convenient
neighborhood location. The company is wholly owned by Samuel and Michele Lees, who founded it
many years ago. In recent years, the Lees have not been involved in managing the company but have
hired professional managers. The Lees currently live in the Cayman Island and rely on the cash flow
generated by DMSM to live on
.
DMSM has gone through significant changes in their operations. A year ago, the Lees hired Joseph
Warden as the chief executive officer of the company to help turn the company around after a number
of unprofitable years. At the time Joseph was hired, the Lees were worried that DMSM would go
bankrupt and they would lose their main source of income. Joseph was well known as an excellent
"turnaround" manager, and the Lees were prepared to pay for someone who could reverse the current
financial status of their business. The Lees agreed to pay Joseph a salary plus a bonus of
25
percent of
net income
(
in accordance with ASPE
)
in each year of a three
-
year contract. DMSM
'
s tax rate is
40
%
.
In his first year with DMSM
,
Joseph made significant improvements in the strategic direction of the
business. In addition to adding online shopping and corporate clients, DMSM new business strategy
is to provide customers with a consistent value add shopping experience, offering a broader assortment
of national brand
-
named merchandise, consumables and seasonal items. Products are available in
individual or multiple units at low, fixed price points. This allowed DMSM to compete with large
retail chain stores such as Costco and Walmart.
Joseph is thrilled to complete the inaugural year under his guidance. He estimated that his bonus this
year could reach to $
60
,
000
.
After hiring Joseph, the Lees feel confident about the viability of DMSM
.
Joseph has just presented the financial statement for the current year to the Lees for their approval. The
Lees are pleased about DMSM
'
s profitability, but they are concerned about some accounting treatments
that appear to have contributed to the significant increase in net income. Here are the items noted
below: ANSWER THIS QUESTION: To attract more customers, Joseph has begun offering credit to specific Corporate customers. At
the end of the year, the accounts receivable balance reached $
150
,
000
.
He has not, however,
recorded an allowance for bad debt for the period. He believes there is no need to estimate bad
debt expense since he only provides credit to customers that have a long
-
standing relationship
with DMSM and has gone through an extensive credit review and pass with flying colours. The industry averages
10
%
of ending accounts receivable as an appropriate allowance for doubtful
account for this type of industry. FOLLOW THIS CRITERIA: You are a CPA who is also a good friend to the Lees. The Lees have come to you for advice on the
above accounting issues. They are concerned that Joseph's accounting choices will result in him
receiving a bonus that does not reflect his actual performance as CEO and unreasonably reduce the
amount of money that the Lees receive from DMSM
.
Lastly, the Lees has asked you to suggest three
key ratios that should be included in Joseph
s performance evaluation. They don
t want you to provide
the calculation but rather an explanation to why these three should be part of Joseph
s bonus
calculation.
Required:
Prepare a report for the Lees providing them with the advice they seek. Please use the following framework:
You need to provide an analysis of users and their strategic objectives.
In analyzing each issue in the case, follow the case analysis approach discussed in class
namely the
I
/
A
/
A
/
R
approach to case writing. I
=
Identify the Issue; A
=
Analyze why it
s
an issue; A
=
Alternatives, if any; and R
=
Recommendation.
In your recommendation, ensure you clearly indicate your recommendation, discuss the
impact of your recommendation to users
needs and objectives and calculate the financial
impact, if any.
In the role of the CPA advisor, students must assess each financial reporting issue, recalculate
the net income, and estimate the revised bonus payable
(
if any PLEASE FOLLOW THE FORMAT!!!!!
)
.

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