Transcribed Text
Diamondz Corp.
Diamondz Corp. manages recording artists, produces music, and rents out recording space to new and
established musicians. The Dumais family members are the only shareholders. Marie and Bernard Dumais, who
started the company in 1983, retired from active management in the company in 2010. They hold the preferred
shares. Their children, Alexandra and André Dumais now run the business. Each holds 50% of the outstanding
common shares.
The company wants to open a recording studio in downtown Peterborough. Preliminary estimates indicate the
cost of constructing the studio and installing state of the art recording equipment is $2,500,000. Alexandra and
André need to look at options for financing this new venture. One option is to do an initial public offering (IPO)
of shares in Diamondz Corp.
You are the Chief Financial Officer (CFO) [and a non-family member] of Diamondz Corp. Alexandra and
André have asked you to help with the analysis and decisions concerning the financing options. They run the
creative side of the business and do not feel comfortable preparing the analysis. You attend a meeting with
Alexandra (CEO) and André (President) on January 14, 2015.
Required: Prepare a report for the CEO and President that discusses the current financial
performance of Diamondz Corp. and addresses the financing options for the proposed recording
studio.
Financial Performance - you should include the following in your report:
a. Cash Flow Statement for 2014 with 2013 comparative statement[Note: statements to be
done on accounting paper and attached as an Appendix]
b. Report to include an explanation of the role of the Cash Flow Statement and a discussion of
Diamondz’s cash flow in 2013 and 2014
c. In anticipation of a possible IPO, Diamondz follows IFRS. Prepare a Statement of
Changes in Equity for 2013 and 2014. [[Note: statement to be done on accounting paper]
d. Calculate the following performance, liquidity and solvency measures for 2012, 2013, and
2014 to 1 decimal point. Comment on Diamondz’s performance over the period
2012-2014.. [Note: set up calculations in chart form on accounting paper]
i. Profit Margin
ii. EPS
iii. Return on Equity (ROE) (calculate for 2014 and 2013)
iv. Current ratio
v. Debt-to-total assets
vi. Times interest earned
Financing Options for the proposed expansion - you should include the following in your report:
a. A discussion of the advantages and disadvantages of financing the expansion with a debt
issue or with an equity issue. [Note: must be typed, double-spaced]
b. Discuss the impact, if any, on the existing shareholders of Diamondz and the impact on
future financial performance of Diamondz for each option. For example, refer to the
calculations you did and discuss the affect on some or all of those calculations. Are there
other options in addition to a debt or equity issue?
c. Your recommendation for a financing option
Report: style, structure, content, spelling, grammar [10 marks]. [Note: report must be typed, doublespaced] Please include your student ID # and seminar section
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Diamondz Corp.
Statement of Financial Position
At December 31,
2014 2013 2012
ASSETS
Current Assets:
Cash & Cash Equivalents $375,000 $320,000 $520,000
Accounts Receivable [net] 800,000 900,000 600,000
Inventory 200,000 300,000 100,000
Prepaid Expenses 50,000 80,000 60,000
Total Current Assets 1,425,000 1,600,000 1,280,000
Land 575,000 500,000 500,000
Building, net 1,480,000 1,600,000 1,580,000
Equipment, net 1,789,500 1,000,000 700,000
TOTAL ASSETS $5,269,500 $4,700,000 $4,060,000
LIABILITIES &
SHAREHOLDERS’ EQUITY
Accounts Payable 990,000 773,000 434,000
Accrued Liabilities 450,000 148,000 96,000
Unearned Revenue 118,000 160,000 120,000
Income Taxes Payable 250,000 219,000 270,000
Sales Taxes Payable 169,505 80,000 -
Demand Bank Loan 119,000 120,000 100,000
Current Liabilities 2,096,505 $1,500,000 $1,020,000
Total Liabilities 2,096,505 1,500,000 1,020,000
Shareholders’ Equity:
Preferred Shares, Series A, $2.40;
20,000 issued and outstanding
600,000 600,000 600,000
Common Shares, 100,000 issued
and outstanding [note 2]
2,000,000 2,000,000 2,000,000
Retained Earnings 572,995 600,000 440,000
Total Shareholders’ Equity 3,172,995 3,200,000 3,040,000
TOTAL LIABILITIES &
SHAREHOLDERS’ EQUITY
5,269,500 $4,700,000 $4,060,000
The accompanying notes are an integral part of these Financial Statements [There is important
information in the notes that you need to complete your analysis]
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Diamondz Corp.
Diamondz Corp.
Income Statement
For the years ended December 31,
2014 2013 2012
Recording and Production Fees $549,000 $630,000 $516,000
Management Fees 265,500 320,000 244,000
Studio Rental Fees 100,000 100,000 100,000
Total Revenue 914,500 1,050,000 860,000
Expenses:
Depreciation 285,500 251,833 224,622
Salaries 210,000 182,000 165,000
Other Operating Expenses 132,855 127,367 141,578
Total Operating Expenses 628,355 561,200 531,200
Net Operating income before
interest & taxes
286,145 488,800 328,800
Interest Expense 113,550 88,800 88,800
Net Income before taxes 172,595 400,000 240,000
Income Taxes [30%] 51,600 120,000 72,000
Net Income $120,995 $280,000 $168,000
The accompanying notes are an integral part of these Financial Statements
Diamondz Corp.
Diamondz Corp.
Cash Flow Statement
For the year ended December 31, 2013
Cash from Operations:
Net Income $280,000
Adjustments for non-cash items:
Add: Depreciation 251,833
Changes in non-cash current operating accounts
Add: Increase in Accounts Payable 339,000
Increase in Accrued Liabilities 52,000
Increase in unearned revenue 40,000
Increase in Sales Taxes Payable 80,000
Less: Increase in Accounts Receivable (300,000)
Increase in inventory (200,000)
Increase in Prepaid Expenses (20,000)
Decrease in Income Taxes Payable (51,000)
Cash from Operations $471,833
Investing Activities
Purchase of capital assets (571,833)
Financing Activities
Bank Loan proceeds 20,000
Dividend payments
Preferred Shares (48,000)
Common Shares (72,000)
Cash inflow (outflow) from financing activities (100,000)
Cash outflow for the year (200,000)
Cash at the beginning of the year 520,000
Cash at the end of the year $320,000
The accompanying notes are an integral part of these Financial Statements
Diamondz Corp.
Note 1 – Summary of Significant Accounting Policies
a. Diamondz Corp. is incorporated under the laws of Ontario. It follows International Financial
Reporting Standards (IFRS).
b. Revenue Recognition
Deposits received for studio rentals are recognized on the date that the client uses the studio.
Management Fee retainers are recognized in revenue over the life of the management contract.
c. Cash & Cash Equivalents
Cash and Cash Equivalents consist of cash on hand, bank balances, and money market investments
with original maturities of three months or less.
d. Provisions for Doubtful Accounts
The provision for amounts due from clients is established based on an assessment of a client’s credit
quality as well as subjective factors and trends, including the ageing of Accounts Receivable balances.
e. Inventories
Inventories relate to items commonly used in the studio such as blank disks and recording tapes.
Inventories are valued at the lower of cost (calculated using the weighted-average cost formula) and net
realizable value. The consumption of inventory is included in Other Operating Expenses.
f. Land, Building & Equipment
Building & Equipment are recorded at historical cost. They are depreciated on a straight-line basis over
the estimated useful lives as follows:
Buildings 40 years
Computer Hardware 3 years
Vehicles 5 years
In 2014 Diamondz made a significant investment in computer hardware and software. They replaced
the accounting software package and payroll processing software, upgraded all of the computer
hardware and purchased the Blackberry Z10 for senior management. Total expenditures were
$955,000.
A vacant lot in downtown Peterborough became available in September 2014. Diamondz purchased
this land for $75,000 with the intent of building the new recording studio on it.
Diamondz Corp.
g. Earnings per Share
Basic earnings per share is calculated by dividing the net earnings available to common shareholders
by the weighted average number of shares outstanding during the year.
h. Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
Canada requires management to make assumptions and estimates. These estimates affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
These estimates and assumptions are based on management’s historical experience, best knowledge of
current events and actions that the Company may undertake in the future. Significant areas requiring
the use of management estimates relate to the determination of inventory valuation, goods and services
tax, provincial sales tax and income tax provisions. By their nature, these estimates are subject to
measurement uncertainty and the impact on the financial statements of future periods could differ
materially from those estimated.
Note 2 - Share Capital
a. The $2.40 non-voting Cumulative First Preferred Shares, Series A, are entitled to fixed cumulative
preferential cash dividends at the rate of $2.40 per share per annum.
b. Stock Split
On June 30, 2014 Diamondz issued a 2 for 1 split in the common shares. This had the effect of
doubling the number of common shares issued and outstanding.
c. Earnings per share
Basic per share amounts are based on the weighted average number of shares outstanding. In 2014,
the weighted average number of shares issued and outstanding was 75,000 shares. The weighted
average number of common shares issued and outstanding in 2012 and 2013 was 50,000
Note 3 – Contingencies
The company is party to various legal actions and complaints arising in the ordinary course of business.
It is the opinion of the Company that the ultimate resolution of such matters will not materially affect
the Company’s financial conditions or earnings.