Professional Documents
Culture Documents
Day 3
Put-It-Together Furniture
(Booklet #1 – Case)
Examination Details
The examination consists of:
Times noted above are guidelines. Candidates are responsible for managing the time allocation.
The case should be answered in Word and Excel. The main body of your response should be in
Word. Only supporting calculations should appear in Excel, within a single worksheet. You are
responsible for clearly explaining all your calculations.
Answers or part answers will not be evaluated if they are recorded on anything other than
Word or Excel.
The CPA Canada Handbooks and the Income Tax Act, in the form of searchable PDF files, are
available on your computer during the exam if you have Securexam installed (Program Files /
Software Secure, Inc / Securexam Student / PDFDocumentViewer.exe). These PDF files
provide the standards in effect and tax laws enacted at December 31, 2017.
A tax shield formula and other relevant tax information are available at the end of this booklet.
Rough-note paper is available in a separate booklet. Rough notes, and any other annotations
made in the exam booklet will not be evaluated.
Mock Common Final Examination Day 3 Page 2
Put-It-Together Furniture Ltd. (PIT) manufactures wooden furniture including tables, dressers,
bookcases, and cabinets. The furniture is functional and affordable. The products have been
standardized for ease of production. Each product is designed to be assembled by the customer,
which generates cost savings.
To maximize efficiency, PIT produces at least 1,000 units of a product such as bookcases before
switching to a different product such as cabinets. With the increased demand, PIT’s minimum
number of units in a production run has been steadily increasing and PIT has never needed to
monitor sales per product. Occasionally, certain products do not sell well, so PIT discontinues
producing them and simply donates them to charity.
The industry is very competitive by nature. Annual demand is growing, as a downturn in the
economy means that more customers are looking for bargains and do-it-yourself projects have
been on the rise. Sales peak in the fall, with college and university students outfitting their dorm
rooms and apartments with PIT products, and decline after the Christmas sales season.
PIT was founded three years ago by Walter Smith, a trained carpenter. Walter invested his life
savings in PIT and took out a five-year small business loan from his local bank. The bank also
provided a line of credit with a maximum borrowing of $380,000 that requires audited financial
statements with an unqualified audit opinion to be provided to the bank, due 90 days after the
company’s year-end.
As a condition of the operating line of credit, the bank required Walter to form a Board of Directors
(Board) to provide effective oversight. Walter formed a Board in the first year of operations that
consisted of Walter and his childhood friends, Tom and Peter. Tom is a biochemist by trade and
Peter is a history professor. Walter recently added his new girlfriend, Maggie, to the Board.
Maggie has been a highly successful personal financial advisor for the past ten years. She is
known for being outspoken in her views, which often clash with those of Walter and have resulted
in some heated arguments recently.
It is now March 25, 2018. You, CPA, are a friend of Walter’s and he has asked for your assistance.
The Board just finished the meeting with the auditor to discuss the results of the 2017 year-end
audit, its first meeting since the 2016 year-end. The Board was surprised that the auditor
suggested that PIT is headed for a cash flow problem if it does not improve its cash management
and that the company may not continue to be a going concern. The Board would like your help
in understanding and evaluating the financial factors that the auditors will use to assess PIT’s
ability to continue as a going concern.
The Board plans to hold its next meeting on April 5 to discuss PIT’s cash management. To help
the Board predict PIT’s cash needs, Walter has asked you to prepare a cash budget for April and
to provide suggestions to improve PIT’s immediate cash flow. Appendix I provides details of PIT’s
expected cash receipts and disbursements.
Walter has asked you to evaluate PIT’s working capital using a comparison of ratios to industry
standards and other relevant qualitative and quantitative analyses. Appendix II provides extracts
from the audited financial statements and industry data.
Additionally, you are to quantitatively assess how PIT’s current working capital management is
impacting the line of credit and suggest ways to improve PIT’s working capital management.
Last week, Walter received a letter from the bank, reminding him that the audit report was due
shortly and that the bank would like further background information on the Board members.
Walter would like you to provide him with a separate memo that evaluates any deficiencies relating
to the Board and to provide recommendations to address each deficiency.
APPENDIX I
EXPECTED CASH RECEIPTS AND DISBURSEMENTS
Sales Receipts
Most sales are made on account to a few large retailers. Orders must be shipped within
five days of receipt, or there is a risk the order will be placed with another supplier.
On occasion, there are inventory stock-outs or the discovery of damaged inventory that
cannot be shipped.
Historically, bad debts are rare, and all accounts receivable are normally collected within
90 days without the need for PIT to assess any financing charges. PIT has never lost a
retailer as a customer.
Invoices are issued at the end of each month. To encourage early payment, customers
are given a 1% cash discount on accounts paid within 10 days after the end of the month
of the sale, with the balance being due in 30 days. Historically, this has resulted in 40% of
customers taking advantage of this discount.
On March 31, it is expected that the company will have the following accounts receivable
outstanding:
APPENDIX I (continued)
EXPECTED CASH RECEIPTS AND DISBURSEMENTS
Cash Disbursements
The raw materials inventory is budgeted to increase by $25,000 during April. This was
not factored into the raw materials purchases for production above. Other inventories will
not change. Inventory counts are done once a year at the December 31 year-end.
Half of the raw materials purchased each month are paid for during the month of purchase;
the other half are paid for in the month following the purchase.
All April payroll amounts will be paid within the month of April.
Walter’s bonus of $25,000 was accrued at December 31 and will be paid April 30.
Monthly selling and administrative expenses paid in cash during the month will be
$28,000.
At March 31, it is expected that $185,000 will have been used on the line of credit. The
amount used has been gradually increasing, and occasionally has been used to cover the
fixed monthly payments on the small business loan.
APPENDIX II
AUDITED FINANCIAL STATEMENT EXTRACTS AND INDUSTRY DATA
Dividends - - 5,000
Industry Standards
2017 2016
Days sales in receivables 28 days 25 days
Days sales in inventory 32 days 30 days
END OF EXAM
a) Present Value of Total Tax Shield from CCA for a New Asset
= CTd 2 + k = CdT 1 + 0.5k
(d + k) 2(1 + k) (d + k) 1 + k
For 2018
2018 1 2
2017 1 1 1 1
2016 1 1 1 1
2015 1 1 1 1
This is the rate used for taxable benefits for employees and shareholders, low-interest loans,
and other related-party transactions. The rate is 4 percentage points higher for late or
deficient income tax payments and unremitted withholdings. The rate is 2 percentage points
higher for tax refunds to taxpayers, with the exception of corporations, for which the base
rate is used.