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999B06

UP-IN-SMOKE CORPORATION

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Joanne Lansink prepared this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
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University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

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Copyright © 1999, Richard Ivey School of Business Foundation Version: 2017-12-06

John Henry prided himself on the knowledge that he offered the best quality and selection of cigars in all
of Southwestern Ontario. Since his shop had opened in London, Up-In-Smoke Corporation had been both
profitable and enjoyable. Henry attributed a great deal of his success to his suppliers.
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Henry dealt solely with three suppliers (see Exhibit 1 for purchase invoices, and Exhibit 2 for payment
schedule). Two suppliers were located in the United States, one in Florida and one in San Francisco. The
third supplier was located in Tillsonburg, Ontario. These three suppliers allowed Up-In-Smoke
Corporation to offer an exotic selection, including home-grown products. Each supplier offered a variety
of well known cigar brands from which to order. Purchases outside of Canada were subject to an import
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duty calculated on the total invoice price. As of the beginning of the year, duty was nine per cent.

Up-In-Smoke Corporation used an independent transportation company to handle shipments, with all
orders guaranteed to reach Henry within 10 days of shipment. Transportation charges were based on a per
box price of $0.53.

The troubles Henry had encountered since opening his own business he considered minor, except for the
more serious issue of theft for which he had yet to find a solution.
No

It was January 4, 2006, and Henry was anxious to compile his financial results for his 2005 fiscal year. In
particular, he wondered about his cigar inventory, since it made up the bulk of his sales. A physical count
on December 31, 2005, revealed 2,608 cigars on hand (Exhibit 3). While John remembered he started the
year with 2,875 cigars valued at a total cost of $47,438, sales records indicated Up-In-Smoke Corporation
had sold 6,520 cigars during the year. With all the necessary information at hand, John was excited to see
his results.
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REQUIRED

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1. Post all opening balances and inventory related transactions to T-accounts for fiscal 2005
2. Calculate the total cost of each purchase to the nearest dollar and the cost per cigar of each purchase to
three decimals.
3. Determine the cost of goods available for sale, the ending inventory, and the cost of goods sold for the

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cigar inventory using the specific identification inventory valuation method.
4. At the end of fiscal 2005, the net realizable value of Henry’s cigars was $18. He wondered what effect
this would have on his inventory valuation.

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No
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Exhibit 1

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1
PURCHASE INVOICE SUMMARIES

Florida Cigars 

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Boxes Date Shipped Date Arrived
Invoice # Price Per Box($)
Ordered (Month/Day/Year) (Month/Day/Year)
1001 375.00 52 01/05/05 01/14/05
1002 422.00 66 12/27/05 In transit

Total Invoice 47,352.00

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Shipping Terms FOB Florida
Credit Terms 5 E.O.M.

G. Burns Co.
San Francisco, U.S.A.
Boxes Date Shipped Date Arrived
Invoice # Price Per Box ($)
Ordered (Month/Day/Year) (Month/Day/Year)
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2003 455.00 64 09/21/05 09/28/05 2

Total Invoice 29,120.00

Shipping Terms FOB San Francisco

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Credit Terms 3/10, net 60

Tillsonburg Smoke Ltd.

Boxes Date Shipped Date Arrived
Invoice # Price Per Box ($)
Ordered (Month/Day/Year) (Month/Day/Year)
3004 415.00 67 04/17/05 04/20/05
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3005 390.00 74 06/15/05 06/19/05

3006 408.00 57 12/24/05 In transit

Total Invoice 79,921.00

Shipping Terms FOB London

Credit Terms 2/8, net 30
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1
All boxes contained 25 cigars, and invoice costs did not include any applicable duty.
2
Upon receiving the September 21 order, it was realized five boxes had not been sealed properly by the manufacturer.
Burns agreed to credit Henry’s account for these boxes, and to refund any applicable duty charged on the purchase price of
the returned boxes. The supplier also covered return shipping costs.
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Exhibit 2

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PAYMENT SCHEDULE

Date of Payment
Invoice #
(Month/Day/Year)

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1001 01/15/05
1002 Not yet paid
3004 04/27/05
3005 06/29/05
3006 Not yet paid
2003 09/30/05

NOTES

•
•
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Credit terms were calculated from the date of ownership.
All invoices were quoted and paid in Canadian dollars.
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• The company used the periodic inventory method.
• The duty rate increased to 12 per cent for all orders placed after May
1, 2005.
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Exhibit 3

PHYSICAL INVENTORY COUNT

as at December 31, 2005
No

Invoice # Units on Hand

1001 440
3005 929
2003 1,239
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copyright. Permissions@hbsp.harvard.edu or 617.783.7860