The sky is the owner of a small business called Sky’s Skateboards. Sky, who grew up in a circle of avid boarders, started the business last year, initially adding cool designs to her siblings’ and friends’ skateboards. The sky is 19 years old and has ambitions of starting her college degree within the next two years. Current Business Plan For the past year, Sky has customized used skateboards for $30 each (the average job took $5 in materials and an hour of her time). Initially, she averaged 15 designs a month. This number peaked in the summer (beginning of June to the end of September) at about 30 designs monthly. By the end of the year, the average had dipped to about 15 a month again. If Sky were to go and work for a local skate shop, she would be paid $12 an hour for completing similar work. The sky is wondering what she should project for this business activity next year, assuming demand increases by 5%, but is also curious as to what her best- and worst-case scenarios might look like. Worst Case Scenario She believes that in a worst-case scenario, sales may decline by 20% throughout the year, with the exception of the June to end of September summer period, where sales may decline by 10% only. In this scenario, she believes it would take 90 minutes per design, as opposed to an hour (status quo). Best Case Scenario In the best-case scenario, sales will increase by 12.5% year-round, reaching a 25% increase for the summer months. In this scenario, she believes it would only take her 45 minutes per design, as opposed to an hour (status quo). Analysis Can you please prepare an analysis to advise Sky on financial projections for the best case, worst case, and status quo scenarios next year? Please demonstrate your calculations by using an appendix or by embedding a table within the report to show your work. Sky enjoys working on old boards as it allows her to connect with local members of her community and learning about their skating journeys. The personal element of this business models makes her feel fulfilled at what she does. She also enjoys the fact that these boards are not extremely time-consuming to complete so she has more time to study and spend time with friends. It is also a process she is familiar with and has gained a level of mastery at. Potential (New) Business Plan Over the holiday season, Sky had done some research and found she could order quality skateboards in basic colors (black, white, blue, etc.) for $50 each. She expects to sell boards for $100 each after designing them. If a customer wants to request a specific design, she will charge a premium and sell the skateboard for $125. Sky anticipates that each new skateboard will require $10 in materials (after initial purchase) and require two hours of her time. For custom designs, she is budgeting an extra 30 minutes for communicating with her customer. For the time being, Sky will continue selling out of her parents’ garage as it keeps costs low. She is planning on relying on word-of-mouth marketing and perhaps some newsletters too. Sky’s friend, Libby, says she can design and print unique newsletters monthly for $300 per month. Libby has not always been the most trustworthy friend to Sky but sees this as an excellent opportunity to reap the benefits of her hard work. She would like Sky to sign a contract for the next 24 months, agreeing to pay her $300/month if she would like to use her advertising service. This would lock Sky into a two-year contract with Libby starting next year when she is 20 years old. Before learning about this offer, Sky had planned to distribute the newsletters herself to save money. Sky likes the idea of advertising more through Libby’s unique newsletters but is wondering if the cost-benefit makes sense. She is projecting 200 skateboard sales under this new business model, of which 25% are custom designs ($125). By advertising each month with Libby, there will be a 10% boost to her overall sales. The sky is wondering what her income projections for the next year might look like if she chooses to pursue this new venture with, and without the unique newsletter to boost sales. Dilemma Sky would like you to know your thoughts on whether she should continue her old business plan of modifying used skateboards (using status quo figures, not best- and worst-case scenarios), her new venture where she orders quality skateboards (without Libby’s advertising), or her new venture where she orders quality skateboards with Libby’s advertising. She’d like to know which opportunity is the most financially lucrative, and would also like you to provide a list of 2-3 pros and cons for each of the three business opportunities. Technical & Ethical Issues with Tax Sky recently spoke to her father who is an experienced businessman because she isn’t sure about her revenues and costs for the past year. Her dad vehemently stressed the importance of a sole proprietor maintaining accurate records for business and tax purposes. The sky had grown impatient with the conversation and ended it but is now curious about what her father may have meant. In Sky’s opinion, as a sole practitioner, she can expense her cell phone (personal and business use), any costs surrounding her personal car (maintenance, gas, insurance), and any meals she has with friends. She keeps the receipts of their meals and would like to claim the entire amount as a business expense to reduce her own tax exposure. Any inventory she purchases will be recorded as an expense on her income statement to further reduce any tax exposure. Please advise Sky of why accurate tax reporting is important in Canada and about any misconceptions she currently has. She would also like to know what type of tax return she would have to file as a sole proprietor without an incorporated business and Canadian/Provincial business number. Investment Analysis & Accounting Treatment for New Asset Sky is also considering acquiring a piece of machinery that helps her print designs on new or used skateboards, regardless of which business plan she ends up selecting to move forward with. Please treat this acquisition separate from any other analysis you prepare for income projections; it should not be included in any projections you put together. Below, you’ll find the details of this purchase: Initial Investment $75,000 Estimated useful life 12 years Salvage Value $3,000 Estimated Annual Cash Flows Increased Cash Inflows from Machinery $7,000 Operating and Maintenance Costs ($2,000) Reduction in Manual Labour $3,000 Net Annual Cash Flow $8,000 If she were to acquire this asset, she would have to take out a $75,000 loan for which 5% interest on principal only will be charged annually. 

She is wondering the following:

• Is this a good investment and why or why not? Please discuss quantitative and qualitative factors to consider. 

• She heard the term ‘pay-back period’, what does this mean, and what would be considered a ‘good’ payback period for her? 

• What accounting entries (Debits and Credits) might she have to book upon purchasing the asset?

 • What accounting entries (Debits and Credits) might she have to book after a full year of using the asset, assuming she elects to use the straight-line depreciation method?