MGAB02 – 2023 Winter Semester
Due: Sunday, March 19, 2023 (11:59 pm) in Quercus

Page 1
Instructions:

This case assignment should be done in groups of 5 students. The group can be formed within the
following lecture sections L03, L07, L09 and L11. This assignment incorporates all lecture
materials from MGAB01 and MGAB02.

The format of the case analysis will be discussed in class by the instructor. The case should be
typed in a Word document, 1½ spaced on letter-size paper using one-inch margins, maximum
length is 4 pages (approximately 1,000 words), exclusive of tables, appendices and references and
12-point Times New Roman font or equivalent.

Outside sources (articles, books, etc.) are encouraged but not required. Any reference should be
listed in a bibliography at the end of the paper (not part of the page count). If applicable, you must
show all calculations and state all assumptions leading to your answer. No marks will be given
for the correct answer only. Marks will be awarded on the analysis that supports your
recommendation.

Case Assignment – Submission Format:
Students need to submit the case assignment in a word document to Quercus in the “Hand In
Assignment” tab. Please ensure only one person from your group submit the assignment. The
instructor will further review the procedures to submit the assignment via Quercus in class. When
you upload the file to Quercus, please make sure that the file name consists of: Your name (student
submitting the case): Student Number: Lecture Number: Case Project (eg:
johndoe999999999L03CaseProject). On the first page of the case submission, please ensure
you list the members of the group by listing their name, student number and lecture section.
Marks will be deducted (25% of your score) if you fail to follow the above instructions.

On the due date, an electronic copy will also be submitted to Ouriginal. Normally, students will be
required to submit their course essays to Ouriginal for a review of textual similarity and detection
of possible plagiarism. In doing so, students will allow their essays to be included as source
documents in the Ouriginal reference database, where they will be used solely for the purpose of
detecting plagiarism. The terms that apply to the University's use of the Ouriginal service are
described on the Ouriginal.com web site

Except for any unusual circumstances pre-approved by the instructor, no late assignment will be
accepted and marked after the due date.

Team Work:
Normally students are expected to contribute equally when working in a team project and all
students should receive the same mark. However, if students within a particular group do not feel
that the efforts are contributed equally among the team, the group can request to complete a peer
evaluation form from the instructor. All members must complete the peer evaluation form and
submit individually to the instructor. Based on the peer evaluation, the instructor may adjust the
mark up and down by 10 marks from the group mark for each student depending on their
participation in the group project.
Group Case Assignment
MGAB02 – 2023 Winter Semester
Due: Sunday, March 19, 2023 (11:59 pm) in Quercus

Page 2
Question:
Big Lots Stores Limited (Big Lots) is a chain of retail stores across Canada. Big Lots sells a wide
range of kitchen and hardware items, cleaning supplies and seasonal items that it obtains from
major manufacturers and wholesalers. Big Lots' strategy has long been to deliver value and help
shoppers save time by offering everyday products with low prices and good value in convenient
neighborhood location. The company is wholly owned by Sanjay and Priyanka Chowdry, who
founded it many years ago. In recent years, the Chowdrys have not been involved in managing the
company but have hired professional managers. The Chowdrys currently live in Bermuda and rely
on the cash flow generated by Big Lots to live on.

A year ago, the Chowdrys hired Joseph Wan as the chief executive officer of the company to help
turn the company around after a number of unprofitable years. At the time Joseph was hired, the
Chowdrys were worried that Big Lots would go bankrupt and they would lose their main source
of income. Joseph was well known as an excellent manager, and the Chowdrys were prepared to
pay for someone who could reverse the current financial status of their business. The Chowdrys
agreed to pay Joseph a salary plus a bonus of 25 percent of net income (in accordance with ASPE)
in each year of a three-year contract. Big Lots’ tax rate is 40%.

In his first year with Big Lots, Joseph made significant improvements in the strategic direction of
the business. In addition to adding online shopping and corporate clients, Big Lots new business
strategy is to provide customers with a consistent value add shopping experience, offering a broad
assortment of national brand-named merchandise, consumables and seasonal items. Products are
available in individual or multiple units at low, fixed price points. This allowed Big Lots to
compete with large retail chain stores.

Joseph estimated that the bonus this year could reach to $45,000. After hiring Joseph, the
Chowdrys feel confident about the viability of Big Lots.

Joseph has just presented the financial statement for the current year to the Chowdrys for their
approval. The Chowdrys are pleased about Big Lots' profitability, but they are concerned about
some accounting treatments that appear to have contributed to the significant increase in net
income. Here are the items noted below:

1. Joseph launched an extensive national advertising campaign amounting to $300,000 to
improve the image and reputation of Big Lots and to attract new customers. According to
Joseph, the re-branding campaign has been a success and as a result Big Lots has been able
to increase its profit margins and has increased the flow of customers through all stores.
Joseph capitalized 50 percent of the advertising costs as goodwill since the reputation of Big
Lots has improved tremendously from before. Joseph directed the accountant to amortize the
goodwill over five years, arguing that the increase in Big Lots’ reputation in the market will
benefit the company over a number of years. A full year amortization was expensed this year.
2. Big Lots has had a policy of writing off all slow-moving inventory at the end of each fiscal
period. Slow-moving inventory is defined as merchandise that has been on hand for six
months or more. Joseph has changed the policy and now only writes off inventory that he
believes cannot be sold. Since the advertising campaign mentioned in (1) above is so
Group Case Assignment
MGAB02 – 2023 Winter Semester
Due: Sunday, March 19, 2023 (11:59 pm) in Quercus

Page 3
successful, Joseph believes all merchandize in stock can be sold and no write offs are
necessary for the current year. Records show that the December 31st ending inventory balance
over six months old were as follows: $50,000 hardware items, $45,000 cleaning supplies and
$25,000 seasonal items.
3. To attract more customers, Joseph has begun offering credit to specific Corporate customers.
At the end of the year, the accounts receivable balance reached $150,000. He has not,
however, recorded an allowance for bad debt for the period. He believes there is no need to
estimate bad debt expense since he only provides credit to customers that have a long standing
relationship with Big Lots and has gone through an extensive credit review and pass with
flying colours. The industry averages 10% of ending accounts receivable as an appropriate
allowance for doubtful account for this type of industry.
4. Until this year, Big Lots depreciated $500,000 leasehold improvements to its stores over the
lease term, usually five years. However, Big Lots' leases usually have options that allow the
company to extend the lease for an additional five years and in the past the company has
always exercised that option. This year, Joseph changed the depreciation period for leasehold
improvements to ten years for all leases that give Big Lots the option to extend.
5. During the year, Big Lots opened a new store in Newfoundland, its first store east of Montreal.
To get the store into operation, the following costs were incurred: (i) $100,000 to make the
building fully wheelchair-accessible; (ii) $41,600 to outfit the new employees with Big Lots
uniforms; (iii) $12,700 for the reception to introduce the company and the store to the
community and others in the industrial mall where the store is located; and (iv) $64,400 in
payroll costs for the new employees while they were being trained. Joseph capitalized the
above noted costs as an asset called pre-operating costs.
You are a CPA who is also a good friend to the Chowdrys. The Chowdrys have come to you for
advice on the above accounting issues. They are concerned that Joseph's accounting choices will
result in him receiving a bonus that does not reflect his actual performance as CEO and
unreasonably reduce the amount of money that the Chowdrys receive from Big Lots. Lastly, the
Chowdrys has asked you to suggest three key ratios that should be included in Joseph’s
performance evaluation. They don’t want you to provide the calculation but rather an explanation
to why these three should be part of Joseph’s bonus calculation.

Required:
Prepare a report for the Chowdrys providing them with the advice they seek.


Group Case Assignment
MGAB02 – 2023 Winter Semester
Due: Sunday, March 19, 2023 (11:59 pm) in Quercus

Page 4
Note: Please make every effort to apply the case analysis framework discussed in class. Here are
a few suggestions to keep in mind:

Please use the following framework:

• You need to provide an analysis of users and their strategic objectives.
• In analyzing the issues in the case, follow the case analysis approach discussed in class
namely the “I/A/A/R” approach to case writing. I= Identify the Issue; A= Analyze why
it’s an issue; A= Alternatives, if any; and R= Recommendation.
• In your recommendation, ensure you clearly indicate your recommendation, discuss the
impact of your recommendation to users’ needs and objectives and calculate the financial
impact, if any.
• In the role of the CPA advisor, students must assess each financial reporting issue,
recalculate the net income, and estimate the revised bonus payable (if any).


Here is an example of a good description of a user and user needs (not related to the case) is
included below:
Bank of Northern Ontario (BNO)
The BNO will use ESL’s financial statements to monitor ESL performance and its cash flows as
well as any other terms, covenants, or conditions included in the line of credit agreement.


Here is a suggested example (not related to the case) in how to apply the I/A/A/R approach to
case analysis:

Analysis of the Financial Accounting Issues

Initial Franchise Fee Revenue Recognition – Regular Rate Fees
Issue: When should the revenue be recognized for the initial franchise fee of $225,000.

Analyze the Nature of the Issue and Implication: The recognition of revenue will impact the
revenue and net earnings reported in the Ontario and Quebec regions, and therefore, impact
Jason’s bonus.

Alternatives:
Alternative 1 – Recognize 100% of revenue when the franchise agreement is signed
• This would be more appropriate for a franchisor with a long history of creating
successful franchises. Given that ESL is new in the Ontario and Quebec market,
this alternative may be too aggressive.

Alternative 2 – Recognize 100% of revenue when the franchise commences operations
Group Case Assignment
MGAB02 – 2023 Winter Semester
Due: Sunday, March 19, 2023 (11:59 pm) in Quercus

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• Once the operations have commenced, ESL will no longer incur significant costs
and there will be less uncertainty about the collectability of future payments.
Therefore, it may be appropriate to record revenue once the franchise commences
operations.

Alternative 3 – Recognize 100% of revenue one-year after the franchise commences
operations
• Given that ESL is new to the Ontario and Quebec markets, there is some
uncertainty about the collectability of the $150,000 payment as there is no past
history to suggest how likely a franchisee is to go bankrupt. Therefore, it may be
most appropriate to recognize revenue after one year of operations. However,
deferring the initial payments may be too conservative.

Alternative 4 – Recognize $75,000 when the operations commence and $150,000 one year
after
• This alternative is based on the rational that the first two payments can be
recognized as revenue when received, which will help offset the initial costs
incurred to establish the new franchise; however, the remaining payment is deferred
until one year after operations commenced given the uncertainty surrounding its
collectability.
Recommendation
• Alternative 2 would be appropriate if ESL had a long, established track record of
developing successful franchises or if an analysis of the historical collections of
franchises have panned out (i.e., you were able to determine the likelihood of collecting
the remaining $150,000 based on similar historical transactions); however, given the lack
of historical information, I would recommend alternative 4 as the most appropriate
revenue recognition policy for the initial franchise fee.

• It appears that Jason has recorded the initial franchise fee revenue based on alternative
one (Ontario – 6 × $225,000 = $1,350,000; Quebec – 6 × $225,000 = $1,350,000).

• Five of the seven locations in Ontario are open, and six of the eight locations in Quebec
are open. However, one in Ontario and two in Quebec signed the special, promotional
agreement (discussed below). Therefore, there are six locations in Ontario and six in
Quebec that have signed the normal agreement.
o Therefore, a total initial franchise fee revenue of $900,000 (12 × $75,000
[$50,000 + $25,000] should be recognized.
o The final payment revenue of $150,000 per franchise should be recognized after
their first year of operations.
o This will result in an adjustment to the revenue and operating income of
$1,800,000 ($2,700,000 – $900,000).