Construct and interpret final accounts to understand profitability, financial position and business decisions in IB Business Management SL.
Sam created a marketing plan to obtain finance for AFA, a fair-trade retail business. A marketing plan can identify objectives, target markets, marketing mix, budgets and implementation. Sam initially had poor understanding of accounting and finance, so applying appropriate accounting principles and ethics is important for reliable records, correct cash-flow/profit information, tax compliance, honest reporting and stakeholder trust. AFA sells fair-trade chocolate, coffee, clothing and stationery through pop-up stalls, retail outlets and an e-commerce business-to-consumer website.
With reference to A F A, explain why applying appropriate principles and ethics of accounting practice is important.
Currently, LC manufactures ceiling fans in a building that is financed by long-term debt. LC is considering selling the building to pay off the long-term debt and moving production to a new building, which LC would lease.
Lusanka Company (LC)
Lusanka Company (LC) manufactures ceiling fans using a mass production process. Selected financial information for LC is shown in Table 1.
Table 1: Selected financial information for LC for the year ended 31 December 2022 and as of 31 December 2022 (figures in \$000s)
Currently, LC manufactures ceiling fans in a building that is financed by long-term debt. LC is considering selling the building to pay off the long-term debt and moving production to a new building, which LC would lease.
Using relevant information from Table 1:
calculate LC's net profit after interest and tax for the year ended 31 December 2022 (no working required);
construct a fully labelled balance sheet for LC as of 31 December 2022.
Explain the impact on LC's profit and loss account of selling its current building and leasing a new one.
AFA’s growth created diseconomies of scale, declining gross and net profit margins, management unhappiness and concerns about recruitment. Sam and Finn disagreed about fringe payments, a worker cooperative and a possible takeover. The potential international retailer could provide fresh capital, online presence and intangible assets, but might not retain employees or managers and could threaten AFA’s fair-trade mission and stakeholder relationships. The existing financial data and takeover details in this question’s root must remain available to the user.
AFA was at a critical point. Sam and Finn had not fully resolved their disagreements. They seemed to be constantly arguing but Sam could also see that new issues were emerging. At their most recent meeting in early 2018, Finn provided the following financial information to illustrate the declining trend in gross profit margin.
Table 1: Selected financial information for A F A
In addition, the recruitment of new staff was becoming a problem, as the wages that AFA offered were much lower than fair trade competitors. In a meeting between Sam and Finn, they argued over the best way to financially reward and motivate newly recruited workers, given the lower wages paid by AFA.
Finn argued for a reward system based on fringe payments (perks), as this was being offered by AFA's main competitors, the supermarkets. Sam countered that AFA should form a cooperative involving all physical stores. He argued that creating a worker cooperative could give all members a sense of community and fulfillment and motivate them so that all members of the cooperative would benefit. There would also be additional stakeholder benefits. Finn argued that a worker cooperative was too difficult to organize and operate and would not solve the problem of recruiting staff.
In the meantime, AFA was continuing to attract a good deal of publicity. Sam had appeared on a national television show about young, innovative entrepreneurs. After the television show ended, one very large international retailer with a strong online presence contacted Sam about the possibility of a takeover. Sam initially refused, but as the details of the takeover became clear he started to seriously consider the opportunity. By selling the business Sam would have enough fresh capital to start new, innovative businesses and make some of his other visions and ideas into reality. In addition to the corporate social responsibility (CSR) AFA was generating, the takeover would give AFA access to other intangible assets. However, the international retailer had indicated that it could not guarantee keeping all existing and newly recruited employees and managers. Finn and Kim were both very worried that Sam would even contemplate the takeover, which they felt was an act of betrayal to all the stakeholders of AFA.
Define the term intangible asset.