Garden and Landscaping Emporium Natalie Daguiam

Date: September 2011

To: Sue and Paul, GLE

From: CA

Partnership/Reporting Concerns
Despite the different divisions earning different revenue and expenses, for tax purposes the
couple/you would be considered a partnership and should record the total profit or loss as a
business, and then each couple report 50% of the total profit or loss for the business.
However, before tax can be calculated it is recommended GLE make adjustments to properly
allocate revenue and expenses appropriately between the two divisions:

Commissions
- Can be allocated to Garden centre since it is given to students when they increase their sales,
which assuming relates solely to the sale of products in the garden centre is appropriately
accounted for

Cost of Goods Sold

Issue: Currently is allocated solely to the Garden Centre, however between $35,000-$60,000 of
product Is takes from inventory for landscaping jobs.
Analysis: for appropriate representation this amount, whichever the owners believe to be a more
accurate number should be allocated to landscaping. The controls around tracking inventory for
landscaping jobs will be discussed later in this report.
Conclusion: Move 60,000 to landscaping expenses for COGS, making Landscaping division less
profitable, and gardening more profitable no change in overall partnership.

Bad Debt Expense

Should confirm with GLE that these bad debts are from customers from Garden Centre and not
Landscaping customers. If they are from landscaping, that proportion should be allocated to that
division.

Bookkeeping
It is likely that Sues mom does the book-keeping for both divisions together and therefore this
expense should be allocated evenly to both divisions, not just the garden centre. Thus $7,500 should
be moved to Landscaping (Exhibit X)

Wages
Issue: Currently is allocated solely to the Garden Centre, however there are 3 full-time labourers for
landscaping jobs.
Garden = 5 students (part time) = $10/hr * 60 hours/week = $600/week
Landscaping= 3 full time * $20/hour *8 hours/day *5 days/week = $2,400/week
Total week = 3000 20% Garden 80% Landscaping
Total Wages = 132000 $26,400 Garden, $105,600 Landscaping by percentage
Revenue
The upfront payment received for December should be taken out of revenue this year as per ASPE
3400.05
(a) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in
that all significant acts have been completed and the seller retains no continuing managerial
involvement in, or effective control of, the goods transferred to a degree usually associated with
ownership; and this has not been met because the landscaping job has yet to be performed and
therefore the significant risks and rewards of ownership has not been transferred to the buyer
Conclusion: This amount should be taken out of revenue for this period and added to the following
years income.

See Exhibit 1 for adjustments:

Confirm whether they paid the correct amount of tax last year

After these adjustments are made it is clear that each division is profitable. To compute taxable
income, Sue and Paul should take the profits from the business as a whole and divide the profits
50/50 to be taxed in each of their hands to fully utilize the lower marginal tax rates.
The taxable income for each should be: $48,500 (Exhibit 1)

This also means that they did not pay the correct amount of tax last year as they did not divide it up
as partnership income.

Recommend Controls that can be implemented to improve the running of day-to-day operations

Inventory Garden Supplies for landscaping

Issue: Currently Henry and Paul are taking inventory from the garden centre and not manually
recording what they have taken on the tracking sheet
Impact: Incorrect inventory being recorded and difficult to track cost of goods sold. Further, the pricing
of the jobs for landscaping may not be correct, affecting margins
Recommendation:
- Inventory counts can be done on a weekly basis to ensure that all products they have in the
system are also on the floor.
o High risk of obsolete inventory/plants could die quality of the plants no different
from a grocery store

- Ideally, they invest in an accounting/product software system that allows for specific
identification of inventory which would make this easier.
- Detailed invoice for each landscaping job highlighting al products used.
- The invoice could be created by Paul/any landscaper for the job and the garden centre can
receive the order and set the appropriate supplies aside that way they do not take too much
- This invoice should then be given to book-keeper to record inventory taken, who can also keep
track of the cost per job to determine if it is profitable.
- This invoice could also be used to track/validate returns
- Controls for the return and guarantee on life of plants to validate their claim
The customer receipt should include all the supplies that were used throughout the job and
accounted to on a customer basis, such that each customer has their own file. Therefore if a
customer comes in, their ID can be retrieved to validate their claim.
Employee Time Sheets/Payroll
Issue: Employees handing these late and incorrectly recording hours worked
Impact: this may cause the indirect recording of payroll for each employee some employees may be
overcompensated.
Short term long term recommendation
- Timesheets can be filled out daily on a worksheet at the common place of entry and exit to the
garden centre then Sue or other higher managers can sign off that the time recorded for
each employee seems correct/reasonable.
- It then can be taken down at the same time at the end of the week by the book-keeper/Sues
mother who will record all the signed off times
- It should become clear to all employees that the time sheet will be taken down at the same
time each week, and unrecorded times will go unpaid.
- If GLE invests in IT software, it may be possible to integrate this system with the payroll
system, such that the employees use their employee code to sign into a system each day and
the same code to log off. If an employee forgets to sign in or sign off they should tell Sue as
soon as possible who will have the authority to change the time to the correct amount.

Landscaping Tools
Issue: Currently supply them on an as-needed basis. However, some tools may be left at the job site
or at the shop and they are replacing these items un-necessarily
Impact: May have redundant assets/tools, increases their expenses
Recommendation: Similar to the inventory controls suggest each tool that is used on a job should
be detailed on a list and reconciled upon the job completion. Further, Paul could implement a sign-in,
sign-out sheet for the tools for each day on the job that he verifies at the end of each day/week.

Discuss new software and how they could use IT to help assess GLE performance

IT system that codes each individual product so that it is easy to keep track of. Ideally the software
should allocate a cost per customer depending on what products the landscapers took for the job.
Therefore, not only would they be able to validate returns they will also easily be able to calculate
proper cost of goods sold. By knowing how much of each product is selling will also tell them which
products are the most profitable to them and which products are decreasing profits on a per unit sold
basis. This information will be helpful in determining which products to order more of, and what
products are better to allocate in landscaping jobs depending on their margins.
Head for the Mountains Natalie Daguiam

To: Susan, Head for the Mountains

From: CA

Since the bank requires audited financial statements & Abba for royalty calculations, HFM and Abba store will
require audited financial statements. It is likely these financial statements be prepared under ASPE or IFRS as
Abba has requested the financial statements be prepared to a similar accounting policies as theirs. Since Susan
is running a small private business, it should be sufficient to report in accordance with ASPE. Susan should
confirm with both the bank and Abba if this method aligns with their request before she hires an auditor.
Lastly, it should be noted that I, CA, cannot perform the audit as there may be independence issues in terms of
advocacy threats, as I have been an old friend of yours, as well as a potential self-review threat as I have
prepared your taxes.
It should also be noted that since HFM has not been audited in the past, all opening inventories have not been
audited which adds risk to the audit, and may lead to a scope limitation. This should be discussed up front
with both the bank and Abba so they are aware of Susans situation.

To determine how much financing is required for the new Abba operation calculations have been made in
Exhibit 1 using the information provided by Susan. It was determined that Susan will require $207,500 of
additional funding outside her existing line of credit for both businesses.
Other financing options available to Susan could be:
- Negotiate loan from Abba
- Potential outside investor in the town/partnership
- Negotiate larger line of credit with bank based on credit history with HFM

Further, to determine whether Abba will be successful enough to make this venture feasible, based on the
projections Susan gave us, a projected cash flow was determined (Exhibit 2). From this it was determined
there would be positive cash flow in the first year, making this opportunity very attractive. This also provides
rationale that if Susan requires additional financing, she will have positive cash flow to finance these payments
for the first three years. That said, some sensitivity analysis should be done in the event that these
assumptions are too high to fully illustrate the downside risk of this venture.

Lastly, it is important to assess the qualitative factors that play a role in making the decision to pursue the
Abba venture. Since Susan is highly experienced in the retail industry she will likely be able to use the same
skill-set to make Abba store just as profitable. She also likely has a strong customer base that she can use to
advertise the Abba store too as well. However, she runs the risk of cannibalizing on HFM current sales, as the
product line is very similar. Further, her right to first refusal for similar locations is a very appealing part of the
agreement, as if her store is successful she has the ability to open up further storefronts in more locations to
increase her revenues further.