Overview
Overview of Eastern Township Sales Ltd.
Eastern Township Sales Ltd. (Eastern) was established in 1995. Its shares were listed on the Toronto Stock Exchange starting in 2016. The corporation’s headquarters are located in Trois-Rivières, Quebec. It has regional distribution warehouses in Trois-Rivières and four other eastern Canadian locations. The corporation buys Canadian-made appliances and distributes these to regional retail stores that specialize in providing high-quality appliances to customers with higher-than-average disposable incomes. Eastern has a reputation for purchasing appliances that are innovative and reliable, and backing what it sells through a generous wa
anty and refund policy.
Eastern is recovering from a regional economic downturn. Demand for its type of appliances has fluctuated over the past few years. The company has two main competitors, both headquartered in the United States. These both focus on lower-cost appliances. Though Eastern is still ranked as the number one appliance wholesaler in eastern Canada in terms of total sales dollars, its competitors are gaining ground.
Eastern has maintained very good relations with manufacturers and retailers. Retailers actively promote Eastern products as good value for money, and provide valuable feedback to Eastern about retail customer purchasing trends and requests for new products. Unlike its competitors, the Eastern sales force is well-trained. They monitor changing customer preferences for appliances and communicate these back to Eastern management for consideration.
The company recognizes that long-term success largely depends on continued promotion of Eastern products by its retail store customers, which means that the chains must be able to continue to earn high gross profit on sales of these same products. However, increased competition from lower-priced appliances by Eastern’s US competitors has begun to cut into sales and profit margins.
Eastern’s warehouse distribution facilities and processes are state-of-the-art. Once products have been purchased, they are able to be transported from manufacturing plants and to retailers very quickly. Eastern’s distribution costs are usually lower than competitors because its warehouses are closer to customers, and its logistics are efficient. Company management believes costs can also be reduced by renting rather than owning delivery trucks.
v. 7667 Pg. 1
Required: Prepare the following information in .docx or .xlsx format. Label all your work with the version (v.) shown in the bottom left corner of each page of this case.
1 a. Refer to the Trial Balance ("TB") worksheet tab, page 3. Prepare an income statement and statement of changes in equity for the year ended December 31, 2020 using the format shown on the "Pt 1&5" worksheet tab, page 5. Assume all accounts have normal balances.
b. Present 2020 EPS at the bottom of the income statement. Show your calculations. Assume there are 10,000 common shares outstanding at the end of 2019, and the following 2020 transactions:
# Total
Common shares issued on January 1 500 $5,000
2 Using the format shown on the "Pt 2" worksheet on page 7, prepare a note to the financial statements listing 2020 expenses in 'nature of expense' format. Agree these amounts to the 2020 amounts shown on the income statement. Show how you have grouped the expenses. (Reasonable allocations are acceptable. 2020 groupings do not need to agree with 2018 and 2019 groupings shown on the income statement.) Assume the following 2020 amounts:
(Increase) decrease in inventory of goods held for resale $(182,520)
Merchandise purchases $1,165,320
3 Refer to the Trial Balance ("TB") worksheet. Using the format shown on the "Pt 3" worksheet on page 9, prepare classified statements of financial position at December 31, 2019 and 2020. Assume the operating bank loan is due on demand and that 10% of the non-cu
ent bank loans are due within one year at each year end.
4 Refer to the "Pt 4" worksheet on page 11. Calculate ratios shown for the year ended December 31, 2020. Assume all sales are on credit. Show your work. Analyze your results.
5 Refer to the "Pt 1" and "Pt 3" worksheets on pages 5 and 9. Perform vertical and horizontal analysis on the statement of financial position and income statement for 2019 and 2020. Analyze your results.
6 Refer to the "Pt 6" worksheet tab, page 13. On page 14, prepare statements of cash flows for the years ended December 31, 2019 and 2020 from the worksheet information. Analyze the results. Assume that the operating bank loan is part of cash and cash equivalents.
7667 Pg. 2
TB
Trial Balance
Account 2020 2019 2018
Accounts payable 12,800 6,400 2020 3,200
Accounts receivable 350,860 500,480 202,400
Accumulated amortization, patent 2,856 1,190 700
Accumulated depreciation, PPE 204,000 102,000 60,000
Advertising expense 304 160 100
Allowance for doubtful accounts 1,664 1,280 800
Amortization expense 1,666 490 300
Bad debts expense 2,016 1,260 900
Cash 43,560 13,200 8,800
Common shares 79,000 74,000 74,000
Cost of goods sold 982,800 702,000 540,000
Cu
ent tax liabilities 7,560 6,300 6,300
Depreciation expense 230,400 144,000 144,000
Dividends, common shares 700 700 500
Dividends, prefe
ed shares 200 700 600
Gain on disposal of PPE 7,840 9,800 7,000
Income taxes expense (recovered) 55,659 127,773 54,750
Insurance expense 1,216 760 400
Interest expense 9,072 22,680 25,200
Inventory 393,120 210,600 156,600
Investment property rental income 16,408 9,720 9,900
Investment property upkeep 13,908 7,320 6,100
Operating bank loan 213,000 106,500 71,000
Non-cu
ent bank loan 453,600 453,600 504,000
Patent 7,128 3,960 2,200
Post-retirement benefits 5,100 5,100 3,400
Prefe
ed shares, non-cumulative 12,540 6,600 6,600
Prepaid insurance 7,650 5,100 3,000
Property, plant, and equipment 902,918 687,987 720,000
Rent expense 13,932 7,740 4,300
Repairs expense 14,600 7,300 7,300
Retained earnings, opening 662,737 366,000 312,350
Salaries, wages, and commissions 266,000 133,000 70,000
Sales 1,670,760 1,472,000 920,000
Statutory deductions 12,496 11,360 7,100
Telephone expense 12,636 9,720 8,100
Utilities expense 5,376 3,360 2,400
Wa
anty provision 720 720 400
Wa
anty expense 12,168 9,360 7,800
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CALCS PT 1
Type Account 2020 2019 2018
SAL Sales 1,670,760 1,472,000 920,000
LC Accounts payable 12,800 6,400 3,200
AS Accounts receivable 350,860 500,480 202,400
Accumulated amortization, patent 2,856 1,190 700 TAKE AWAY FROM ASSETS NON CURRENT
Accumulated depreciation, PPE 204,000 102,000 60,000 TAKE AWAY FROM ASSETS NON CURRENT
SM EX Advertising expense 304 160 100
EX Allowance for doubtful accounts 1,664 1,280 800
ADM EX Amortization expense 1,666 490 300
ADM EX Bad debts expense 2,016 1,260 900
AS Cash 43,560 13,200 8,800
EQ Common shares 79,000 74,000 74,000
COG Cost of goods sold 982,800 702,000 540,000
LC Cu
ent tax liabilities 7,560 6,300 6,300
ADM EX Depreciation expense 230,400 144,000 144,000
EQ Dividends, common shares 700 700 500
EQ Dividends, prefe
ed shares 200 700 600
ASNC Gain on disposal of PPE 7,840 9,800 7,000 Other Income Net Gain on PPE 7,840
IO Income taxes expense (recovered) 55,659 127,773 54,750 Invest Rental Income 16,408
ADM EX Insurance expense 1,216 760 400 Rental Upkeep (13,908)
AST EX Interest expense 9,072 22,680 25,200 Other Income Net 10,340
AS Inventory 393,120 210,600 156,600
IO Investment property rental income 16,408 9,720 9,900
ADM EX Investment property upkeep 13,908 7,320 6,100
LC Operating bank loan 213,000 106,500 71,000
LNC Non-cu
ent bank loan 453,600 453,600 504,000
ASNC Patent 7,128 3,960 2,200
SM EX Post-retirement benefits 5,100 5,100 3,400
EQ Prefe
ed shares, non-cumulative 12,540 6,600 6,600
AS Prepaid insurance 7,650 5,100 3,000
AS Property, plant, and equipment 902,918 687,987 720,000
ADM EX Rent expense 13,932 7,740 4,300
ADM EX Repairs expense 14,600 7,300 7,300
EQ Retained earnings, opening 662,737 366,000 312,350
SM EX Salaries, wages, and commissions 266,000 133,000 70,000
SM EX Statutory deductions 12,496 11,360 7,100
ADM EX Telephone expense 12,636 9,720 8,100
ADM EX Utilities expense 5,376 3,360 2,400
LC Wa
anty provision 720 720 400
SM EX Wa
anty expense 12,168 9,360 7,800
Eastern Township Sales Ltd.
Income Statement
Year Ended December 31, 2020
EXPENSES CLASSIFED BY NATURE Expense
IN THOUSAND OF DOLLARS Note 2020 2019 2018 Sell & Mark 2020 2019 2018
Advertising expense S 304 160 100 Advertising expense 304 160 100 Selling and marketing $296,068 (158,980) (88,400)
Post-retirement benefits S 5,100 5,100 3,400 Post-retirement benefits 5,100 5,100 3,400
Salaries, wages, and commissions S 266,000 133,000 70,000 Salaries, wages, and commissions 266,000 133,000 70,000 Administrative $0 174,630 167,700
Statutory deductions S 12,496 11,360 7,100 Statutory deductions 12,496 11,360 7,100
Wa
anty expense S 12,168 9,360 7,800 Wa
anty expense 12,168 9,360 7,800
Total Compensation Expense 296,068 158,980 88,400
$296,068 158,980 88,400
Changes in inventories, resale goods (increase) C (182,520) 54,000 156,600 0 0
Merchandise Purchases C 1,165,320
Amortization expense A 1,666 490 300 Administrative
Bad debts expense A 2,016 1,260 900 Amortization expense 1,666 490 300
Depreciation expense A 230,400 144,000 144,000 Bad debts expense 2,016 1,260 900
Insurance expense A 1,216 760 400 Depreciation expense 230,400 144,000 144,000
Rent expense A 13,932 7,740 4,300 Insurance expense 1,216 760 400
Repairs expense A 14,600 7,300 7,300 Rent expense 13,932 7,740 4,300
Telephone expense A 12,636 9,720 8,100 Repairs expense 14,600 7,300 7,300
Utilities expense A 5,376 3,360 2,400 Telephone expense 12,636 9,720 8,100
Total COGS & Administration Expense 1,264,642 Utilities expense 5,376 3,360 2,400
$281,842 174,630 167,700
Represented by: TRUE TRUE
Cost of Good Sold 982,800
Selling & Marketing Expenses 296,068
Administrative 281,842
1,560,710
Earnings Per Share Calculation 2020 2019 2018
Net income (loss) 55659 298137 54750
Prefe
ed Dividends dividends paid -200 -700 -600
Common Shares issued Jan 1, 2020 (Jan 1, 2019) 12 mth 500 0 10050
Outstanding Common Shares issued Dec 31, XXXXXXXXXX) 5000 10050 0
EPS $3.57 $29.74 $5.51 Can't match up EPS in 2018
29.74 $5.42
EPS = (Net Income-Dividends Paid Prefe
ed Shares)
Weighted average (Common outstanding +Issued (12/12))
Part 1 (cont.)
Eastern Township Sales Ltd.
Statement of Changes in Equity
Year Ended December 31, 2020
Ret. Total
Share capital earnings equity
Common Pref.
shares shares Total
Balance (deficit), Jan. 1, 2018 $74,000 $6,600 $80,600 $312,350 $392,950
Net income (loss) 54,750 54,750
Transactions with shareholders
Dividends – common (500) (500)
Dividends – prefe
ed (600) (600)
Balance (deficit), Jan. 1, 2019 74,000 6,600 80,600 366,000 446,600
Net income (loss) 298,137 298,137
Transactions with shareholders
Dividends – common (700) (700)
Dividends – prefe
ed (700) (700)
Balance, Dec. 31, 2019 74,000 6,600 80,600 662,737 743,337
Net income (loss) 55,659 55,659
Transactions with shareholders
Shares issued: Common + Prefe
ed 5,000 5,940 10,940 10,940
Dividends -Common (700) (700)
Dividends -Prefe
ed (200) (200)
Balance, Dec. 31, 2020 $79,000 $12,540 $91,540 $717,496 $809,036
Pt 1&5
Trial Balance
Part 1 Part 5 Account 2020 2019 2018
Eastern Township Sales Ltd. LC Accounts payable 12,800 6,400 2020 3,200
Income Statement AS Accounts receivable 350,860 500,480 202,400
Year Ended December 31, 2020 XXXXXXXXXX 2019/20 Accumulated amortization, patent 2,856 1,190 700
Vertical Analysis Horizontal Analysis Vertical $ Horizontal $ Accumulated depreciation, PPE 204,000 102,000 60,000 Selling & marketing
2020 2019 2018 2020 (%) 2019 (%) 2020 (%) 2019 (%) EX Advertising expense 304 160 100
Sales 1,670,760 $1,472,000 $920,000 13.5% 60.0% $552,000 $198,760 EX Allowance for doubtful accounts 1,664 1,280 800
Cost of goods sold (982,800) (702,000) (540,000) 40.0% 30.0% -$162,000 -$280,800 EX Amortization expense 1,666 490 300
Gross profit $687,960 770,000 380,000 -10.7% 102.6% $390,000 -$82,040 EX Bad debts expense 2,016 1,260 900
Operating expenses AS Cash 43,560 13,200 8,800
Selling and marketing ($281,842) (158,980) (88,400) 77.3% 79.8% (70,580) -$122,862 EQ Common shares 79,000 74,000 74,000
Administrative ($296,068) (174,630) (167,700) 69.5% 4.1% (6,930) -$121,438 COG Cost of goods sold 982,800 702,000 540,000
Income (loss) from operations $110,050 436,390 123,900 -74.8% 252.2% 312,490 -$326,340 LC Cu
ent tax liabilities 7,560 6,300 6,300
Other income, net 10,340 12,200 10,800 -15.2% 13.0% 1,400 -$1,860 EX Depreciation expense 230,400 144,000 144,000
Inc. (loss) before int. and inc. tax $120,390 448,590 134,700 -73.2% 233.0% 313,890 -$328,200 EQ Dividends, common shares 700 700 500
Interest expense ($9,072) (22,680) (25,200) -60.0% -10.0% 2,520 $13,608 EQ Dividends, prefe
ed shares 200 700 600
Income (loss) before inc. taxes $111,318 425,910 109,500 -73.9% 289.0% 316,410 -$314,592 IO Gain on disposal of PPE 7,840 9,800 7,000
Income tax (exp.) recovered ($55,659) (127,773) (54,750) -56.4% 133.4% (73,023) $72,114 IO Income taxes expense (recovered) 55,659 127,773 54,750
Net income (loss) $55,659 $298,137 $54,750 -81.3% 444.5% 243,387 -$242,478 EX Insurance expense 1,216 760 400
EX Interest expense 9,072 22,680 25,200
Basic and diluted EPS $3.57 $29.74 $5.42 AS Inventory 393,120 210,600 156,600
IO Investment property rental income 16,408 9,720 9,900
EX Investment property upkeep 13,908 7,320 6,100
LC Operating bank loan 213,000 106,500 71,000
LNC Non-cu
ent bank