Scents for Less

Topics: Gross margin, Accounts receivable, Balance sheet Pages: 30 (9561 words) Published: April 30, 2013
MODULE 9 Self-test case
(100 Minutes)

Scents for Less Ltd.
Updated Sept 12, 2011 As a recently graduated CGA, you started your new position as controller for Scents for Less Ltd. (SFL) on August 1, 2011. It is now a week later and you are working on several specific tasks assigned to you by your employer. You are understandably eager to impress your new employer and are looking forward to your new responsibilities.

SFL produces generic colognes in relatively small quantities and sells them to local retailers primarily in its own city. These colognes mimic well known perfumes with a lighter note and are marketed as an affordable version of a higher priced designer perfume. In the current economic environment colognes are selling at a faster rate than perfumes, due to the lower price point, which appeals to cost conscious customers. Each batch of cologne takes about three months to produce from start to finish. SFL has a production system that allows six batches to be in progress at any one time, so it starts a new batch twice a month. Regular customers place orders and receive shipments every two weeks, so the timing of orders coincides approximately with the completion and bottling of each new batch. The finance and accounting department consists of you, and a part-time accounts receivable clerk who used to work full-time until a year ago. At that time his hours were reduced to half-time by mutual agreement between himself and your predecessor. The cutback was partly a cost-saving measure and partly because the receivables clerk was nearing retirement age and wanted more free time. However, there currently is quite a delay between the production of the monthly financial statements and the production of an aging analysis. In order to familiarize yourself with the company, you reviewed the most recent draft financial statements of SFL, which were prepared just a few weeks before you took on the position. (Partial financial statements are provided in Exhibit 1.) SFL has been in operation for about seven years and has operated profitably for the last four years. It is a private company owned by two cousins, Shelly and Dave, who each own 50% of the outstanding common shares, and who share management responsibilities. Dave works with the operations side of the business and Shelly works with finance and sales. You report directly to Shelly. The management team (Shelly, Dave, you, and Jack, the perfumer) will be meeting twice a month to review finances, sales, and operational decisions. You attended your first management meeting on your first day of work. At the meeting you met Jack, who, as perfumer, holds the other key management position besides your own. This position has seen high turnover, but Shelly and Dave believe that the perfumer is the key to succeeding in the very competitive market for generic colognes. Those companies who are most successful in replicating the fragrance of the well known designer perfumes are able to sell their product to a variety of retailers. Jack has come to SFL with a reputation for being able to create a wide variety of colognes. He has been with the company since January 2010, and his new blends, which were first available to local retailers in May, are already proving very popular. SFL specializes in the production of colognes which are comprised of up to 96% of denatured ethyl alcohol and no less than 4% essential oils or synthetic chemicals. The essential oils are derived from flowering plants and are ordered through a distributor in Toronto. Synthetic chemicals are manufactured by a local supplier and SFL can order these in premixed amounts. The specific proportions of these ingredients and the choice of essential oils or synthetics is the choice of the perfumer who blends these to create the desired fragrance. This requires careful blending of ingredients and ongoing monitoring as the cologne matures. Shortly after Jack started, he persuaded Shelly and Dave to acquire a new...
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