TUTORIAL MEETING 6

Literature: Weygandt et al. (2019), Chapter 14

Videos: - Cash flows
- Corporate Governance
Additional exercises: - By the end of the week, practice some more by making the additional
exercises that we created on the Wiley Plus website
- You can now also practice your accounting and business skills by
completing Level 2 of the Count FeFe game.

IMPORTANT: You are expected to prepare the two tasks below before the tutorial meeting
using the information in the videos and Chapter 14 of the textbook.

Task 20 Statement of Cash Flows

Yvonne, the controller of CopyService, is drawing up the financial statements for the year
2018. She starts by digging up the 2017 balance sheet.

BALANCE SHEET COPYSERVICE

for the year ended December 31, 2017 (in €)
ASSETS LIABILITIES AND EQUITY
Equipment 30,000 Share capital 20,000
less acc. depreciation (17,712) Retained earnings 14,000
Equipment, net 12,288 Shareholders’ equity 34,000
Note receivable 5,000
Supplies and paper 12,320 Accounts payable 5,700
Accounts receivable 6,438 Wages payable 4,300
Prepaid rent 4,000
Cash 3,954
Total assets 44,000 Total liabilities and equity 44,000

Furthermore, she has the following data available about the year 2018 (in €):
a. Paper and supplies worth 20,000 were purchased on account.
b. At June 30 each year, annual rent is prepaid, totaling 8,000.
c. Wages earned by employees amount to 15,000. A total of 18,000 was paid for wages in
cash.
d. The equipment is estimated to have an economic life of 10 years and has a 10,000 salvage
value. The double-declining balance method is used for depreciation.
e. Cash sales of 18,000 and credit sales of 40,000 were made.
Yvonne starts by recording the transactions that occurred during 2018. She then draws up an
income statement, statement of changes in equity, and a balance sheet for 2018. Below you can
find the income statement, statement of changes in equity, and balance sheet for 2018.

INCOME STATEMENT
COPYSERVICE B.V. 31 December 2018

Revenues:
Sales revenue 58,000
Total revenues 58,000

Expenses:
Cost of goods sold 18,320
Rent expense 8,000
Wage expense 15,000
Depreciation expense 2,288
Total expenses 43,608

Operating income 14,392

Other income 0
Income before income taxes 14,392
Income taxes 0
Net income 14,392

STATEMENT OF CHANGES IN EQUITY

COPYSERVICE B.V. 31 December 2018

Shareholders’ equity 1 January: 34,000

Net income: 14,392
Dividend paid: (5,000)
Shareholders’ equity 31 December: 43,392
 BALANCE SHEET
COPYSERVICE B.V. 31 December 2018

ASSETS LIABILITIES AND EQUITY

Equipment 30,000 Share capital 20,000
Less acc. depr. (20,000) Retained earnings 23,392
Net equipment 10,000 Total’ equity 43,392
Note receivable 5,000
Supplies and paper 14,000
Accounts receivable 4,000 Accounts payable 8,000
Prepaid rent 4,000 Wages payable 1,300
Cash 15,692

Total assets 52,692 Total liabilities and equity 52,692

One of the main investors in CopyService has asked her to also draw up a statement of cash
flows. She wonders what the value of a statement of cash flows is over the other three
statements. When Yvonne sets to work, she recalls that there are two ways of drawing up a
statement of cash flows.

Task 21 Corporate Governance at Swatch

Copy-paste the link in your browser to access the following book:

Schluep Campo, I. and Aerni, P., 2016. When corporatism leads to corporate governance
failure: the case of the Swiss watch industry. Banson.
https://www.researchgate.net/profile/Philipp_Aerni/publication/304037801_When_corporatis
m_leads_to_corporate_governance_failure_the_case_of_the_Swiss_watch_industry/links/576
41a9008aedbc345ecb5d0/When-corporatism-leads-to-corporate-governance-failure-the-case-
of-the-Swiss-watch-industry.pdf

Briefly skim through the first pages of the text to have a basic grasp of the setting (active
investor forming a shareholding company to take power over Swatch). Then read Chapter 6
(pages 68-70; 6.3.3.-6.3.4.) and Chapter 9 (pages 90-94; 9.1-9.2). Answer the following
questions.
1. Discuss the core governance problem of the Swatch group and tie this back to agency
theory. What is the role of governance in this setting?
2. Below you find a snapshot of the board of directors of Swatch. The chair of the board
is related to the CEO, as well as the majority shareholder firm. What are the problems
of doing so in relation to the above-mentioned agency conflicts? Zoom in particularly
on the role of the chair. Do you recognize any benefits?

3. The Swatch group switched from IFRS to Swiss GAAP (domestic accounting
standards) in preparing its financial statements. Taking into account the difficult
inventory position and large lawsuit, why would Swatch make this change? How do
you perceive the inventory and provisions accounts on the balance sheet displayed
below?
4. Have a look at the compensation of the CEO and board.
a. Discuss the relative weight of performance-based compensation. Why would
the board have opted for this percentage?
b. How may this weight have affected accounting decisions regarding the lawsuit
and inventory valuation?
c. If you know that President Trump is paid $400,000 a year, plus an extra expense
allowance of $50,000 a year, a $100,000 non-taxable travel account and $19,000
for entertainment, how do you feel about the magnitude of CEO compensation?
d. How do you perceive the magnitude of board compensation? What about the
compensation of the chair?
5. Discuss the importance of transparency and accounting information regarding
a. Management compensation and incentives
b. Monitoring by external parties (not the auditor).
c. How do a. and b. relate to the inventory position and lawsuit, as well as the
principles in the conceptual framework?
d. How could the auditor improve the information environment?
6. Design a sound corporate governance structure for Swatch, tackling the major problem
areas in Swatch’s organizational structure.
7. What do you think happened next?