Anna Malover is a full-time veterinarian who started her own business five years ago. Anna felt that the market for doggie fashions had a lot of promise, based on her clients’ complaints about fashionable doggie clothes being so hard to find. She decided to start a business to design, make, and sell a line of high-fashion doggie clothes including hats, booties, sweaters, and coordinating accessories under the name Doggie Duds.

Anna wanted to continue her career as a full-time veterinarian and hired a fulltime manager to manage Doggie Duds on a day-to-day basis. Anna has never been involved in the daily operations of the company, relying on periodic meetings with the manager and the company’s annual financial statements. Since the business started, it has grown to be the number-one provider of dog clothes and accessories in the country, with seven stores across Ontario and Quebec. Anna has come to rely on the cash flow generated by Doggie Duds to support her lifestyle and usually pays herself a significant cash dividend each year.

After seeing the cash flow statement for 2013, Anna was very disappointed that the cash balance had decreased for the first time since the business began. As a result, she fired the manager for his poor performance and hired a new manager, Hue Gego, to

“turn around” the company in 2014. Anna offered Hue a bonus based on the increase in total cash from 2013 to 2014.

It’s now January 2015. Upon seeing the 2014 financial statements, Anna is very pleased with her decision, noting that cash increased significantly during the year. As a result, Anna was able to increase her dividend for the year to $90,000.

Required

a. Who are the users of the Doggie Duds financial statements? What will they be using the statements for? Discuss the possible objectives of financial reporting for Doggie Duds.

b. Do you think that Anna was justified in firing the manager based on poor performance in 2013? Why or why not?

c. Do you think that the company performed as well as Anna thinks in 2014? Why or why not?

d. Do you think it’s wise of Anna to offer a bonus based on the overall increase in cash? Why or Why not?
Note: This question was written by Angela Kellett of the University of Ontario Institute of Technology and is used with permission.

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Doggie Duds Inc. Cash Flow Statement for the Years Ended December 31, Operations Net income Add: Depreciation expense Less: Gain on sale of land* Cash from operations Financing Repayment of bank loan** Dividends Investing Sale of land Purchase of new computer system*** Increase (decrease) in cash Cash balance at the beginning of the year Cash balance at the end of the year 2014 2013 $116,020 $133,500 27,600 25,300 150,000 0 (6,380) 158,800 0 (85,000) (90,000) (50,000) 200,000 0 0 (40,000) 103,620 (16,200) 22,200 38,400 $125,820 $ 22,200 *In 2011, Doggie Duds purchased for $50,000 a vacant lot beside one of its stores for future expansion. As of 2014, the land was still vacant and it was sold in 2014 for $200,000. **In 2012, Doggie Duds borrowed $85,000 from the bank to open its seventh store. The loan was fully repaid in 2013. Doggie Duds has an additional loan of $250,000 still outstanding. The full balance is due on December 31, 2015. ***In 2013, Doggie Duds replaced its aging computer system with a new system that includes integrated sales, accounting and inventory tracking systems, and state-of-the-art registers in all stores. The system is expected to last five years.