International Research Journal of Applied Finance ISSN 2229 – 6891

Vol. IX Issue – 5 May, 2018 www.irjaf.com

Case Study Series

Charlotte Convenience Store: A Case for Accounting Estimate, Inventory

and Income Tax

Tony Ka Fung CHAN Tommy Chi Kin LEUNG* Eden Yi Hang CHOW

Abstract and Learning Objectives

Charlotte Convenience Store (CCS) is a fictitious start-up business in its first year, selling
fast-moving consumer goods to retail customers in a single shop. It is now April 2018. CCS
is going to prepare the financial statements for its first five-month reporting period ended 31
March 2018 in accordance with the International Financial Reporting Standards (IFRSs). In
this case, you will apply the relevant accounting knowledge and skills to account for various
types of transactions and to prepare the financial statements. You will start by applying the
basic principle of accrual basis of accounting for some simple transactions, and then handle
some more advanced issues involving accounting estimate, inventory costing, as well as
deferred tax. You will also practice critical thinking and other generic skills by extracting
relevant information from raw data, determining appropriate accounting treatments, and
providing sensible financial recommendations in a teamwork environment.

Keywords: accrual basis of accounting, accounting estimate, financial statement analysis,

inventory-costing method, income tax

The Case
Charlotte Chan is an energetic woman with entrepreneurial spirit. After graduating with a
first degree in July 2015, Charlotte joined Hang Shin Supplies (HSS), a reputable local
wholesaler in the fast-moving consumer goods industry as a sales executive, in which she had
acquired first-hand experience in sale and procurement. Two years passed quickly. In the
summer of 2017, Charlotte decided to start her own business. With a saving of $200,000 and
her outgoing personality, she decided to start a convenience store, selling goods like canned
soup, rice, and other packaged foods and beverages. On 1 November 2017, she started her
new business: Charlotte Convenience Store (CCS).

The first week in business – early November 2017

Charlotte’s first task was to open a bank account for the business and to locate the shop
premises. After some searching, she signed a one-year rental agreement with a local shopping
mall for a 12-month’s lease from 1 November 2017 to 31 October 2018 for a monthly rent of
$9,000. Full payment was made on 3 November 2017 for the whole rental period. The lease
is renewable subject to mutual agreement. Charlotte enjoyed her life in the shop so much as
she felt that tenants in the shopping mall were just like fellow community members. She
learned that many of the fellow tenants had been operating in the shopping mall for many
years, and their relationship with the landlord had been friendly.

Shop equipment and furniture

After securing her shop premises, she spent $23,000 to buy some equipment and furniture for
business use (a notebook computer, a cash register, and some furniture). She estimated that
these equipment and furniture could be used for at least three years and the economic value
shall reduce evenly to zero. A full month’s depreciation shall be accounted for in the month
of purchase.
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International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
Purchase terms offered by HSS
Having worked for her previous employer for two years, she believed that HSS treats its
customers fairly and responsibly. Charlotte decided to secure the supplies of her inventory
exclusively from HSS, and it was agreed that CCS could purchase on credit but shall fully
settle the purchases made during each month on or before the last working day in that month.
HSS had commonly adopted this practice with its other customers. HSS regularly delivered
goods to its customers twice a month, usually in the second and fourth weeks in each month
for the orders placed in the preceding weeks. Charlotte thought that keeping a stock level of
around two weeks’ sales should be sufficient.

Are you ready? One, Two, Three… Start!

With her energetic working style, Charlotte managed to have the shop started in November
2017. Sales were made to local residents in cash by CCS. Charlotte handled the sales and
cash collections herself via the cash register. All cash collected were stored directly in the
cash register, and Charlotte visited the bank and deposited the cash receipts twice a month,
usually on each Friday morning in the second and fourth weeks of a month. For simplicity,
each time she only deposited a lump-sum in thousands of dollars. A small amount of petty
cash was kept for daily operation in the shop. In early December 2017, Charlotte’s younger
sister, Lucy Chan, joined CCS as a part-time helper for a monthly salary of $3,000.

Inventory management
Since the operation was simple, Charlotte did not regularly count the exact number of units of
inventory on hand. Rather, she briefly observed the available items on the shelves, and placed
order with HSS for items sold out or almost sold out. For popular items, more orders were
placed. When goods were delivered by HSS, Charlotte first put them in a storage room inside
the shop. After the existing goods were sold out, she then refilled the shelves with the next
batch of goods received.

Sales mix and pricing strategies

Initially, Charlotte decided to focus on household foods like canned soup, rice, and cooking
oil. She believed that these daily necessities could help guarantee the revenue of the shop. For
easy management, all goods were priced at a 40% mark-up on cost during the first two
months. However, sales were not good in November 2017. Sales were improving in the
second month, despite still falling short of Charlotte’s expectation. After the first two months’
operation, Charlotte reviewed the performance and concluded: “The selling prices were
simply too high and unattractive!” From 1 January 2018 onwards, all goods on hand were
priced at a mark-up of 20%. Sales had improved encouragingly since then.

In addition to the pricing issue, Charlotte gradually noticed that the goods she had been
selling, say, canned meat and cooking oil, might be too “boring” for the customers. Many
customers were young couples in their 20s and early 30s and did not cook frequently at home.
Since early 2018, snacks and beverages were introduced. They proved to be popular among
the youngsters.

Financial and income tax reporting – 31 March 2018

Assuming that it is now April 2018, the end of CCS’ first reporting period: a five-month
period from 1 November 2017 to 31 March 2018 (the current period). In accordance with the
local tax laws, CCS shall submit its financial statements for the current period to the tax
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authority for income tax assessment on or before 31 May 2018. The operating results shall be
International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
reported in accordance with the International Financial Reporting Standards (IFRSs).
Afterwards, CCS will receive a notice of assessment from the tax authority in July 2018.

Applicable tax laws [Either one of the scenarios below shall be selected.]

Basic scenario of income tax

Income tax is calculated at 20% of the income before income taxes for the period. All
accounting income earned and expenses incurred are taxable/tax-deductible for the same
reporting period.

OR

Extended scenario of income tax

Income tax is calculated at 20% of the taxable profit for the period. Accounting income
earned and expenses incurred are normally taxable/tax-deductible for the same reporting
period, except for the items below:

- Accrued expenses are non-deductible until being actually billed by the vendor and
paid by the business.

- For fixed assets, a tax deduction of 30% on cost is allowed in the year of purchases,
and further deduction for the remaining 70% shall be allowed evenly in the
subsequent two years.

Your Tasks
You are an accountancy student. Charlotte is your close friend. Despite her sound business
acumen, Charlotte is not good at accounting. No accounting records were prepared by her
during the business’ first reporting period after incorporation (from 1 November 2017 to 31
March 2018, the current period).

Nevertheless, Charlotte is a well-organized person. She knows that cash and inventory are
the two most important lifelines for her business. Throughout this five-month period, she has
properly maintained all of the records below (Data I to IV):
I. Bank statement of CCS’ bank account;
II. A monthly summary of total sales and the amounts deposited;
III. Monthly statements issued by HSS; and
IV. Inventory count summary.

At the end of 31 March 2018, petty cash of $4,440 was on hand. It is now April 2018.
Charlotte needs your help to draft the financial results of CCS as well as to explain the key
financial performance to her. To meet the tax-reporting deadline, you shall complete these
before the end of 31 May 2018.

Required:
(i) Prepare the journal entries required for the current period.
(ii) Prepare the statement of profit or loss for the current period.
(iii) Prepare the statement of financial position as at 31 March 2018.
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(iv) Identify the accounting estimates involved and propose the appropriate accounting
treatments in respect of CCS’ situation. (If there is any further information that you
International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
might wish to obtain from Charlotte, please also state them clearly for Charlotte to
follow up.)
(iv) Analyze the performance of CCS and provide financial recommendations to Charlotte.
(You might like to perform some ratio analyses and evaluate the financial implications.)
(For the basic scenario only)

All answers shall be rounded to the nearest integer.

(Note: You have discussed and agreed with Charlotte that a “First-in, First-out” (FIFO)
inventory costing method and a periodic inventory system shall be adopted in accordance
with IAS 2. Also, CCS shall adopt the cost model in IAS 16 to account for the equipment and
furniture.)

Relevant IFRSs:
- IAS 1, Presentation of Financial Statements
- IAS 2, Inventories
- IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
- IAS 10, Events after the Reporting Period
- IAS 12, Income Taxes
- IAS 16, Property, Plant and Equipment
- IAS 36, Impairment of Assets

Data I: Bank statement of CCS’ bank account (a current account without interest)
Date Description Withdra Deposit Balance
wal ($) ($)
($)
1-Nov-2017 Opening Balance -
1-Nov-2017 Cash deposit - CHARLOTTE CHAN 150,000 150,000
1-Nov-2017 ATM withdrawal (1 NOV 2017) 3,000 147,000
3-Nov-2017 Transfer to 001-123456-789 108,000 39,000
4-Nov-2017 ATM withdrawal (4 NOV 2017) 23,000 16,000
30-Nov-2017 Cash deposit - CHARLOTTE CHAN 3,000 19,000
30-Nov-2017 Transfer to 009-987654-321 10,600 8,400
16-Dec-2017 Cash deposit - CHARLOTTE CHAN 9,000 17,400
27-Dec-2017 Payment instruction - Salary (DEC 3,000 14,400
2017)
28-Dec-2017 AutoPay - ABC Electricity Co. (DEC 1,100 13,300
2017)
30-Dec-2017 Cash deposit - CHARLOTTE CHAN 16,000 29,300
31-Dec-2017 Transfer to 009-987654-321 20,500 8,800
2-Jan-2018 Credit as advised - CHARLOTTE 50,000 58,800
CHAN
13-Jan-2018 Cash deposit - CHARLOTTE CHAN 28,000 86,800
27-Jan-2018 Payment instruction - Salary (JAN 3,000 83,800
2018)
27-Jan-2018 Cash deposit - CHARLOTTE CHAN 32,000 115,800
31-Jan-2018 Transfer to 009-987654-321 87,790 28,010
10-Feb-2018 Cash deposit - CHARLOTTE CHAN 90,000 118,010
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24-Feb-2018 Cash deposit - CHARLOTTE CHAN 90,000 208,010

International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
27-Feb-2018 Payment instruction - Salary (FEB 3,000 205,010
2018)
28-Feb-2018 AutoPay - ABC Electricity Co. (FEB 1,200 203,810
2018)
28-Feb-2018 Transfer to 009-987654-321 160,260 43,550
17-Mar-2018 Cash deposit - CHARLOTTE CHAN 90,000 133,550
27-Mar-2018 Payment instruction - Salary (MAR 3,000 130,550
2018)
29-Mar-2018 Cash deposit - CHARLOTTE CHAN 92,000 222,550
31-Mar-2018 Transfer to 009-987654-321 171,920 50,630
31-Mar-2018 Closing Balance 50,630

A memo is attached with the bank statement by Charlotte:

Hello~ Thanks for helping me to draft the accounts. Some remarks for you:

- All money is paid via this bank account. Cash in the shop is used for exchanging
coins for sales to customers only.

- The two deposits of $150,000 (1 Nov 2017) and $50,000 (2 Jan 2018) were invested
by me. All other deposits were from sale collections. But I usually deposit the lump-
sum in $’000 only.

- $3,000 was drawn for petty cash and $23,000 was for buying equipment and
furniture at the beginning.

- 009-987654-321 is HSS’ bank account / 001-123456-789 is for rental payment.

- Electricity bill is received every two months. The next one will be received by late
April.

Data II: Monthly summary of total sales and the amounts deposited
Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018
($) ($) ($) ($) ($)
Sales as recorded in cash 3,290 24,976 60,300 180,500 182,374
register

Amount deposited in bank 3,000 25,000 60,000 180,000 182,000

account

Difference 290 (24) 300 500 374

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International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
Data III: Monthly purchase statements issued by HSS
Hang Shin Supplies
Monthly Statement
Period: 1 November 2017 – 30 November 2017
Customer: Charlotte Convenience Store

Items ordered by and delivered to you Units Unit Total

Price ($)
($)
Canned soup (305g, Cream of chicken) - Brand A can 130 8 1,040
Canned soup (305g, Oxtail) - Brand A can 130 10 1,300
Canned meat (340g, Pork luncheon meat) - Brand X can 130 22 2,860
Rice (5kg, Premium jasmine rice) - Brand P pack 50 46 2,300
Oil (900ml, Pure peanut oil) - Brand Y bottle 100 31 3,100
Total 10,600

Hang Shin Supplies

Monthly Statement
Period: 1 December 2017 – 31 December 2017
Customer: Charlotte Convenience Store

Items ordered by and delivered to you Units Unit Total

Price ($)
($)
Canned soup (305g, Oxtail) - Brand A can 20 10 200
Canned meat (340g, Pork luncheon meat) - Brand X can 60 22 1,320
Rice (5kg, Premium jasmine rice) - Brand D pack 50 54 2,700
Oil (900ml, Pure peanut oil) - Brand Y bottle 50 31 1,550
Oil (2L, Olive oil) - Brand Y bottle 100 123 12,300
Oil (5L, Corn oil) - Brand Y bottle 30 81 2,430
Total 20,500

Hang Shin Supplies

Monthly Statement
Period: 1 January 2018 – 31 January 2018
Customer: Charlotte Convenience Store

Items ordered by and delivered to you Units Unit Total

Price ($)
($)
Canned soup (305g, Cream of chicken) - Brand A can 200 8 1,600
Canned soup (305g, Oxtail) - Brand A can 180 10 1,800
Canned meat (340g, Pork luncheon meat) - Brand X can 30 22 660
Rice (5kg, Premium jasmine rice) - Brand P pack 80 46 3,680
Oil (900ml, Pure peanut oil) - Brand Y bottle 50 31 1,550
Oil (2L, Olive oil) - Brand Y bottle 50 123 6,150
Oil (5L, Corn oil) - Brand Y bottle 50 81 4,050
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Potato Chips (105g, Hot and Spicy) - Brand R pack 100 12 1,200
Potato Chips (105g, BBQ flavored) - Brand R pack 100 12 1,200
International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
Potato Chips (105g, Hot and Spicy) - Brand Q pack 100 9 900
Mineral water (750ml, Sparkling) - Brand T bottle 200 15 3,000
Orange flavored soda (330ml) - Brand K can 200 5 1,000
English breakfast tea (2g x 50 per box) - Brand N box 200 62 12,400
Chinese pu-er tea (4g x 18 per box) - Brand V box 200 68 13,600
Champagne (750ml) - Brand S bottle 100 300 30,000
Beer (500ml x 4, Premium) - Brand Z package 100 50 5,000
Total 87,790

Hang Shin Supplies

Monthly Statement
Period: 1 February 2018 – 28 February 2018
Customer: Charlotte Convenience Store

Items ordered by and delivered to you Units Unit Total

Price ($)
($)
Canned soup (305g, Cream of chicken) - Brand A can 100 10 1,000
Canned soup (305g, Oxtail) - Brand A can 100 12 1,200
Rice (5kg, Premium jasmine rice) - Brand P pack 20 50 1,000
Rice (5kg, Premium jasmine rice) - Brand D pack 20 58 1,160
Potato Chips (105g, Hot and Spicy) - Brand R pack 100 15 1,500
Potato Chips (105g, BBQ flavored) - Brand R pack 100 14 1,400
Potato Chips (105g, Hot and Spicy) - Brand Q pack 100 9 900
Mineral water (750ml, Sparkling) - Brand T bottle 300 15 4,500
Orange flavored soda (330ml) - Brand K can 300 5 1,500
English breakfast tea (2g x 50 per box) - Brand N box 300 65 19,500
Chinese pu-er tea (4g x 18 per box) - Brand V box 300 72 21,600
Champagne (750ml) - Brand S bottle 300 300 90,000
Beer (500ml x 4, Premium) - Brand Z package 300 50 15,000
Total 160,260

Hang Shin Supplies

Monthly Statement
Period: 1 March 2018 – 31 March 2018
Customer: Charlotte Convenience Store

Items ordered by and delivered to you Units Unit Total

Price ($)
($)
Potato Chips (105g, BBQ flavored) - Brand R pack 260 18 4,680
Potato Chips (105g, Hot and Spicy) - Brand Q pack 500 10 5,000
Mineral water (750ml, Sparkling) - Brand T bottle 500 15 7,500
Orange flavored soda (330ml) - Brand K can 330 8 2,640
English breakfast tea (2g x 50 per box) - Brand N box 300 68 20,400
Chinese pu-er tea (4g x 18 per box) - Brand V box 300 74 22,200
Champagne (750ml) - Brand S Bottle 250 350 87,500
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Beer (500ml x 4, Premium) - Brand Z package 400 55 22,000

Total 171,920
International Research Journal of Applied Finance ISSN 2229 – 6891
Vol. IX Issue – 5 May, 2018 www.irjaf.com
Case Study Series
Data IV: Inventory count summary at the end of 31 March 2018
Item Count Results
Canned soup (305g, Cream of chicken) - Brand A 70 cans
Canned meat (340g, Pork luncheon meat) - Brand X 5 cans
Potato Chips (105g, BBQ flavored) - Brand R 176 packs
Potato Chips (105g, Hot and Spicy) - Brand Q 235 packs
Mineral water (750ml, Sparkling) - Brand T 206 bottles
Orange flavored soda (330ml) - Brand K 139 cans
English breakfast tea (2g x 50 per box) - Brand N 168 boxes
Chinese pu-er tea (4g x 18 per box) - Brand V 303 boxes
Champagne (750ml) – Brand S 68 bottles
Beer (500ml x 4, Premium) – Brand Z 183 packages

Authors

Tony Ka Fung CHAN

Lecturer, Department of Accountancy, Hang Seng Management College, Hang Shin Link,
Siu Lek Yuen, Shatin, N.T. Hong Kong, tonychan@hsmc.edu.hk

Dr. Tommy Chi Kin LEUNG*

Department of Accountancy, Hang Seng Management College , Hang Shin Link, Siu Lek
Yuen, Shatin, N.T. Hong Kong, tommyleung@hsmc.edu.hk

Eden Yi Hang CHOW

Senior Lecturer, Department of Accountancy, Hang Seng Management College, Hang Shin
Link, Siu Lek Yuen, Shatin, N.T. Hong Kong, edenchow@hsmc.edu.hk

*corresponding author

Acknowledgement: We are specifically grateful to Dr. Rita Yip, Associate Professor, Department of
Accountancy, Hang Seng Management College, who has assisted in testing the teaching case in her class and
gathered feedback from the students. We are also thankful for the active participation of the students in the
intermediate accounting course of our college.

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