Question: Whispering Oak You are the owner of a golf course, Whispering Oak. The company has been in operations for 10 years and has done well... very well. So well in fact that you were able to hire a General Manager last year, Slim Shady, to look after the day to day running of the business while you relax on a beach in Hawaii. You are lucky to have him. Over the last year and a half he has never taken a holiday, let alone a sick day! He is dedicated to the business. He also appears to be very good with his money, so you are confident that he will be equally good with the finances of the golf course. He recently purchased a posh 2,000 square foot condo in the most exclusive area of town. He drives a new Mercedes SUV, has the best clothes and even has a new Rolex watch! The staff and members love him. You are impressed with this 25 year old. To make life easier for Slim Shady, you created some authority and duties for him. Selected Information from Whispering Oak General Manager duties is below: General Manager will have: Sole authority to hire and fire staff as appropriate To streamline the administration process, the GM has sole authority to order, receive and pay for all golf course inventory and merchandise, To streamline the administration process, the GM has sole authority to add and remove vendors To streamline the administration process, the GM has sole authority to complete the bank reconciliations and make bank deposits. Most of the company sales are in cash. Signing authority on company cheques. Only one signature is required on cheques. Your accountant has called you wanting to discuss the draft financial statements for the year just ended, which is not normal. There was also a problem with a routine audit conducted by the Canada Revenue Agency. A new supplier gave the golf course their wrong Business number and address - the business number doesn't exist and the address can't be found! This is odd as the golf course has done lots of business with the supplier in the last year. Required: 1. The Income Statement and Balance Sheet for Whispering Oak is found on the following pages, along with some industry averages. Select 4 of the ratio's listed and tell me: a. how the ratio is calculated b. what the ratio tells us (what the number means) c. how you would use the ratio to form an opinion on the company 2. Calculate 4 (or more) ratio's for each year (2020 and 2019) and do a quick horizontal analysis. Show your work 3. Using the ratio analysis, horizontal analysis and case facts from the question, discuss if you believe there is an issue with the new General Manager and what the issue could be. How could the owner correct the internal control issue. (As strong answer will tie in case facts with financial results explaining how the results could be a sign of a problem in the company - hint, do you suspect possible fraud? Answers should incorporate both vertical and horizontal analysis, with the majority being vertical analysis) Whispering Oak Golf Course Income Statement Dec 31, 2020 2020 Sales 9,000,000 COGS 7,000,000 Gross Profit 2,000,000 2019 10,000,000 6,000,000 4,000,000 Operating Expenses Office Wages Depreciation Bad Debt Expense 79,000 2,300,000 100,000 250,000 5,000 2,200,000 100,000 TOTAL OPERATING EXP. 2,729,000 2,305,000 Income before Income Tax Income Tax Expense (recovery) Net Income 729,000 400,000 329,000 1,695,000 750,000 945,000 Selected Industry Averages Current Ratio Receivable Turnover Receivable Turnover, in days Inventory Turnover Inventory turnover, in days Profit Margin Gross Profit Margin Working Capital COGS % Sales increase, 2019 to 2020 Average 25 275 1.33 365 1 5% 35% 250,000 65% 25% (Balance sheet on next page) Whispering Oak Golf Course Balance Sheet Dec 31, 2020 2020 2019 Assets Current Cash Accounts receivable Inventory Total Current Assets 50,000 75,000 15,000 140,000 350,000 3,000 16,000 369,000 PP&E 2,500,000 2,600,000 TOTAL ASSETS 2,540,000 2,969,000 Liabilities Current Accounts Payable 10,000 11,000 Shareholder Equity Shares 100 Retained Earnings 2,629,900 100 2,957,900 2,640,000 2,969,000 TOTAL ASSETS AND S/H Equity (2018 A/R amount was $2,500) (2018 inventory amount was $16,500) Question: Whispering Oak You are the owner of a golf course, Whispering Oak. The company has been in operations for 10 years and has done well... very well. So well in fact that you were able to hire a General Manager last year, Slim Shady, to look after the day to day running of the business while you relax on a beach in Hawaii. You are lucky to have him. Over the last year and a half he has never taken a holiday, let alone a sick day! He is dedicated to the business. He also appears to be very good with his money, so you are confident that he will be equally good with the finances of the golf course. He recently purchased a posh 2,000 square foot condo in the most exclusive area of town. He drives a new Mercedes SUV, has the best clothes and even has a new Rolex watch! The staff and members love him. You are impressed with this 25 year old. To make life easier for Slim Shady, you created some authority and duties for him. Selected Information from Whispering Oak General Manager duties is below: General Manager will have: Sole authority to hire and fire staff as appropriate To streamline the administration process, the GM has sole authority to order, receive and pay for all golf course inventory and merchandise, To streamline the administration process, the GM has sole authority to add and remove vendors To streamline the administration process, the GM has sole authority to complete the bank reconciliations and make bank deposits. Most of the company sales are in cash. Signing authority on company cheques. Only one signature is required on cheques. Your accountant has called you wanting to discuss the draft financial statements for the year just ended, which is not normal. There was also a problem with a routine audit conducted by the Canada Revenue Agency. A new supplier gave the golf course their wrong Business number and address - the business number doesn't exist and the address can't be found! This is odd as the golf course has done lots of business with the supplier in the last year. Required: 1. The Income Statement and Balance Sheet for Whispering Oak is found on the following pages, along with some industry averages. Select 4 of the ratio's listed and tell me: a. how the ratio is calculated b. what the ratio tells us (what the number means) c. how you would use the ratio to form an opinion on the company 2. Calculate 4 (or more) ratio's for each year (2020 and 2019) and do a quick horizontal analysis. Show your work 3. Using the ratio analysis, horizontal analysis and case facts from the question, discuss if you believe there is an issue with the new General Manager and what the issue could be. How could the owner correct the internal control issue. (As strong answer will tie in case facts with financial results explaining how the results could be a sign of a problem in the company - hint, do you suspect possible fraud? Answers should incorporate both vertical and horizontal analysis, with the majority being vertical analysis) Whispering Oak Golf Course Income Statement Dec 31, 2020 2020 Sales 9,000,000 COGS 7,000,000 Gross Profit 2,000,000 2019 10,000,000 6,000,000 4,000,000 Operating Expenses Office Wages Depreciation Bad Debt Expense 79,000 2,300,000 100,000 250,000 5,000 2,200,000 100,000 TOTAL OPERATING EXP. 2,729,000 2,305,000 Income before Income Tax Income Tax Expense (recovery) Net Income 729,000 400,000 329,000 1,695,000 750,000 945,000 Selected Industry Averages Current Ratio Receivable Turnover Receivable Turnover, in days Inventory Turnover Inventory turnover, in days Profit Margin Gross Profit Margin Working Capital COGS % Sales increase, 2019 to 2020 Average 25 275 1.33 365 1 5% 35% 250,000 65% 25% (Balance sheet on next page) Whispering Oak Golf Course Balance Sheet Dec 31, 2020 2020 2019 Assets Current Cash Accounts receivable Inventory Total Current Assets 50,000 75,000 15,000 140,000 350,000 3,000 16,000 369,000 PP&E 2,500,000 2,600,000 TOTAL ASSETS 2,540,000 2,969,000 Liabilities Current Accounts Payable 10,000 11,000 Shareholder Equity Shares 100 Retained Earnings 2,629,900 100 2,957,900 2,640,000 2,969,000 TOTAL ASSETS AND S/H Equity (2018 A/R amount was $2,500) (2018 inventory amount was $16,500)