ADMS 4590
COMPREHENSIVE CASES AND MULTI -SUBJECT ACCOUNTING
PROBLEMS
Session 9
USING THE CPA WAY IN QUANTITATIVE ANALYSIS
WHAT ARE THEIR
STRATEGIC
OBJECTIVES
STAKEHOLDERS
QUANT
QUAL
RECOMMEND
/CONCLUDE
Note
CPA WAY: QUANTITATIVE ANALYSIS
QUATNITATIVE ANALYSIS
ASSESS THE SITUATION
- What is the purpose of the analysis
- What information is available
- What tool do you need
ANALYZE THE ISSUE
INTERPRET THE RESULTS
PLANNING
Key facts/figures in your
plan
What do the
stakeholders need to
know
Biases (ie anticipated
costs)
Missing information –
discount rate, missing
costs
Select the Tool
- See next slide
QUANTITATIVE TOOLS – SOME EXAMPLES
ISSUE
ISSUE
TYPE OF ANALYSIS
Capital
budgeting
Should the company purchase the new
asset?
Discounted cash flow/ net
present value (NPV)
Financing
analysis
Product
analysis
Should it expand
Internal rate of return
Does the company have enough cash to Undiscounted cash flow
purchase the asset? If it expands will it analysis
be viable
Which product should be added or
dropped?
CM analysis
Break even
Constrained resource analysis
Short term
Financial
Reporting
What is revised NI
Adjustments related to FR
analysis
CPA WAY: QUANTITATIVE ANALYSIS
QUATNITATIVE ANALYSIS
ASSESS THE SITUATION
INTERPRET:
• KEY CONCLUSION
ANALYZE THE ISSUE
• MISSING
INFORMATION
INTERPRET THE RESULTS
- Use word file and reference to excel exhibit
- State key conclusion
- State assumptions and missing information
- Sensitivity analysis
• SENSITIVITY/UNCERT
AINTY
• ASSUMPTIONS
CPA WAY: QUALITATIVE ANALYSIS
What are the strategic
objectives of the users?
Risks/Rewards
Pros/Cons
Examples of objectives:
- Improving profitability
- Expanding the business
- Maintaining quality
- Going public
- Factors that can’t be quantified
- Risk examples: lack of expertise, production
constraints, quality issues
- Rewards examples: Synergies, competitive
advantage
- EXPLAIN WHY IT IS A RISK OR A REWARD
Conclude on the analysis
- Results of quant plus qual
- Link recommendation back to users and objectives
- Try to identify ways to mitigate risk identified
COMPOSTING TOILETS TAKE UP
- Prepare an outline for the case
- Importance of ranking in the case
R1 –WHICH PRODUCT IS GOING TO BE THE BEST FOR MF TO MARKET (GC 500 AND GC
600)
Quantitative Analysis - Profitability analysis
- See exhibit I for a CM/profitability analysis
- Assumptions: Assumes USD exchange rate remains constant
- Missing information: Extra administrative costs associated
with having supplier in Mexico
- Conclude: Based on the quantitative analysis:
Profit of the GC 500 will be $641,500
Profit for the GC 600 would be $419,000
From a profitability standpoint, CTI should produce the GC500
Exhibit I
Purpose: Determine estimated profitability of the
two composters.
QUANTITATIVE
ANALYSIS –
GC500 OR GC600
Market sales
Share of market
# of anticipated sales
Sales Price
Cost of Sales
DM
DL
Packaging
Total costs
GP per unit
GC500
500000
0.025
12500
200
85.5
24.1
109.6
90.4
GC600 Notes
500000
0.0225
11250
300
125.4
65.1
25.5
216
84
Royalties
12 16.66667 1
Fixed costs
Marketing cost
Amortization of machine
Total per unit profit
Total Market for the goods
Total profit
26 28.88889 2
1.08
1.2 3
51.32 37.24444
12500
11250
641500
419000
Conclusion: Based on the results of our analysis the GC500
product is more profitable to produce and sell the GC 600
product.
R1 –WHICH PRODUCT IS GOING TO BE THE
BEST FOR MF TO MARKET (GC 500 AND GC 600)
GC 500 Pros
GC 500 Cons
- More reliable sales estimates
since it is less that $250, less
risk in sale projections
- Less competition in the segment,
will be easier to attain desired
market share
- USD fluctuations could negatively/positively
affect the product cost
- Use of Mexican manufacturer, could result in
instability of supply,
- Use of Mexican manufacturer, have a
negative impact on customer perception
(made in Canada supplier)
- Current Canadian supplier may become
dissatisfied and may affect quality and
production of other products.
R1 –WHICH PRODUCT IS GOING TO BE THE
BEST FOR MF TO MARKET (GC 500 AND GC 600)
GC 600 pros
GC 600 Cons
- Don’t need to outsource to
Mexico and have the instability in
supply, customer perception will
remain in tact
- Sales estimates are less reliable since GC
600 is priced over $250, greater risk that
the projections are not correct
- A lot of competition in this segment which
could impact projected sales levels
- GC 600 is larger and heavier, since it is sold
to seniors it will be more difficult to use
R1 –WHICH PRODUCT IS GOING TO BE THE
BEST FOR MF TO MARKET (GC 500 AND GC 600)
Recommend:
- Produce GC500 for the following reasons:
- more profitable -> better support the objective to have sufficient cashflows
- less risk in terms of the projected sales figures
- Mitigation strategy to reduce risk for outsourcing to Mexico -> negotiate with
Canadian supplier, find out how much more costly it would be to produce in Canada
R2 – PREPARE A CASH FLOW FORECAST IN ORDER TO
DETERMINE WHETHER THIS INVESTMENT WILL GENERATE
SUFFICIENT POSITIVE CASH FLOWS TO COMPLETE THE EXPANSION
PLANS.
-See Exhibit II
-Assumptions: proceeded with GC 500,
estimated sales are projected
-Missing Information: Changes in fx, unexpected
costs due to move to Mexico
-Conclusion: The cash flow demonstrates that we will generate
sufficient cash flow to cover 45% of the investment
Exhibit 2
Purpose: To prepare a projected cash flow forecast
2023
Operating
CM for CT210
231,030
CM for CT310
1,163,162
CM for CT410
1,273,474
Margin for GC500
1,130,000
Total margins
3,797,667
2024
235,651
1,186,426
1,464,495
1,130,000
4,016,572
Advertising
Mktg GC500
Gen & admin
Design & eng.
Royalties
Salaries
Engineer salary
Additional sales mgrs
Additional commissions
Total outflows
Net operating inflows
-
337,807
325,000
422,258
274,160
150,000
867,429
180,000
150,000
152,475
2,859,130
938,537
Tax @ 30%
After tax cash flows
-
281,561.07 656,975.84
Investing cash flows
Machine -GC500
Total investing
-135000
-135000
Financing cash flows
Loan interest
-100000
Total cash inflow
421,976
Cumulative cash flow
-
362,795
325,000
453,494
274,160
151,250
884,778
180,000
150,000
172,110
2,953,587
1,062,984
-
318,895.26 744,088.94
-100000
644,089
Notes
240,364
1,210,154
1,493,785
1,130,000
4,074,303
1
2
3
4
370,051
325,000
462,564
274,160
152,513
902,474
180,000
150,000
179,570
2,996,332
1,077,971
5
per case fact
5
15% increase from last year
6
no change, increase 2% for inflation
7
323,391.44 assume 30%
754,580.02
-100000 1,000,000x 10% interest
654,580
1,720,645
Cash required for expansion
Conclusion:
2025
2500000
45%
1125000 (2.5 million @ 45%)
Cumulative cash flow will generate $1.7 million, which will cover the $1.125 million needed.
FINAL EXAM - TIMED OPEN BOOK INDEPENDENT CASE EXAM
2.5 hours – 1 longer 2 hour case or 2 short 1 hour cases (30 minutes buffer for uploading,
printing and tech issues)
How to study:
Complete all cases since midterm with time constraint, review pre-midterm cases
Complete the “other” role of the group project
Complete the “mock” exam and debrief
Review technical competency areas: Financial reporting, Management Accounting have a heavier focus but
will integrate audit, finance, strategy and governance.
We have now integrated several technical areas since the midterm,
Practice your ranking
Review FR, MA, Finance, Audit, Strategy and governance technical areas covered
Collaboration is strictly prohibited
CASES COVERED POST MIDTERM
CASE
Assessment Opportunities
Cinepro
1 MA Quant analysis of the film festival profitability
2 MA Qaul analysis of the film festival
3 S&G Board governance
4 S&G Performance measures for the film festival
5 FR issues (revenue recognition, impairment, assets held for sale)
Bobbin Family Farms
1 MA Quantitative analysis – breakeven on the teashop
2 MA Qualitative analysis on teashop
3 MA Quantitative analysis – NPV on Wind turbine
4 ASSR – procedures to test revenue from Toby’s
5 FR issues – Rev rec, ARO, convertible debt
Environmentally Friendly Diapers
1 MA Quant analysis – NPV of organic diaper line
2 MA Qual – organic diaper line
3 FR issues – A/R, Inventory, rev rec, tax expense
4 ASSR– Controls
5 ASSR – inventory count, independence threat
6 Big picture – will the loan covenant be satisfied
CASES COVERED POST MIDTERM
CASE
Assessment Opportunities
Group Case Project FR – Sig influence, impairments, capitalization of costs,
componentization, intangible assets
ASSURANCE ROLE
ASSR – RMM
ASSR – Materiality & approach
ASSR – Substantive Procedures / for acquisition
ASSR – WIRS
PM ROLE
MA – Critique supplier bonus agreement & prepare revised calculation (cost analysis)
MA – New contract with Chinese customer
MA – Quant on contract with Royal Lobster
MA – Qual on contract with Royal Lobster
Composting Toilets
MA – Quant on profitability of Garden composters
MA – Qual on profitability of Garden Composters
FIN – Qaunt projected cash flow
TAX – Tax issues
QUESTIONS
0
