The thing you have to understand is how these movies work. You start out with just an idea, but generally no cash. Thats where producers like me come in. We find ways of raising the money necessary to get the movies written and the actors trained. If the movie is a success, we hope to recover all those costs and whole lot more, but cash flow is the problem. Since less than half of all movies make money, you cannot get very much from banks.

Take my current project, the Adams Project (AD). You only have to look at the cash inflows to see how many sources I had to approach to get the cash. As you can see, most of the initial funding comes from the investors in the limited partnership. They put up their money to buy a percentage of the future profits of the movie.

The money that the investors put up is not enough to fund all the start-up costs, so you have to be creative. Take cinema fees for example, the rights for the cinemas to play the movies. Well, AD sold the right to be played at the large chain cinemas this year for the next years performance. These amounts are non-refundable.

Consider the sale of movie right. Lots of good films get turned into TV series or made into sequels and prequels. Once the movie is a success, the movie rights are incredibly expensive. My idea was to sell the movie rights in advance. AD got a lot less money, but at least we got it upfront when we needed it.

The other sources are much the same. We received the government grant by agreeing to have at least 50% Canadian content. We also negotiated a bank loan with an interest rate of 5% a year plus 1% of the gross revenue of the movie, instead of the usual 16% annual interest a year. Even my fee for putting the deal together was taken as a percentage of the profit, so just about everybody has a strong interest in the success of this movie.

REQUIRED:

Prepare a memo address the major financial accounting issues to be established by AD. List the issues and make your recommendations. Do not prepare financial statements.

Summary of Cash Flows for the period Ended 31 December 20x2
(in thousands of $)
Cash Inflows:
	Investor contributions to limited partnership		$ 6,000
	Bank Loan		2,000
	Sale of movie rights		500
	Government grant		50
	Cinema fees		20
			8,570
Cash Outflows:
	Salaries and fees for rehersal period		3,500
	Costumes and sets		1,000
	Micellaneous costs		1,260
			5,760