Memo To: Jakob Janssen From: CPA RE: StillGood Food Sales Pricing Options Option 1: Lower The lower sales price results in overall sales of $509,500, and meets the 10,000 target of excess revenue over expenses. Furthermore, SGF's mission as a not for profit organization is to reduce food waste. Option 1 results is more sales volume (i.e less food being wasted because it is sold). Option 2: Higher As shown in exhibit 1, the higher sales price results in an additional excess revenue over expenses of $7,688, as the increase in price is greater than the decrease in sales volume. Qualitatively, this option results in a decrease is overall sales volume, and therefore, greater food waste. The greater food waste is also seen in the increase in wastage costs. Conclusion: As SGF is a not for profit organization, an increase in excess revenue over expenses beyond their required target is not a priority for the company. The mission of the company is to reduce food waste which is only achieved by increased sales volume rather than price. Therefore, it is recommended that SGF proceed with the lower pricing option as the option is still forecasted to meet the required 10,000 excess revenue over expenses while also following the strategic objectives of the organization. RSS Proposal Quantitative analysis - Based on the cash flow analysis in Exhibit 2, the RSS initiative would require financing until month 5, at which point the business would have a positive return. The analysis also calculates the cheapest security option, and depends on the assumptions that only 5% of clothing will go unsold. SGF should also consider possible defects in clothing received from RSS. Qualitative analysis - SGF should consider the strategic fit of the RSS proposal. SGF's mission is to reduce food waste, clothing is outside of the strategic objectives. SGF should also consider financing for this proposal. Many donations are restricted and it the company would need to raise funds for this particular project from either the bank or through donations.
Recommendation - It is suggested that SGF focuses on reducing food waste as this is their first year of operations. The company also has donations from 6 individuals pending to be used towards the opening of new stores. Their primary focus should be directed towards their current mission statement. Expanding into a different area, such as clothing, should be a consideration once the company is established and new strategic objectives can be considered once research can be performed. Home Office Expenses As per ITA 18 (12) Home office expenses can be deducted if the space is: i. the individual's principal place of business, or ii. used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business; As you spend 25 out of the 40 hours (i.e 63%) in the week doing admin work at home, this space can be considered your principal place of business. Exhibit 3 calculates the expenses that are deductible as an employee. Property taxes, home insurance, mortgage interest, CCA, phone and interest are not deductible for employees. Only long distance phone calls are eligible for deduction that are placed for business purposes. The maximum home office deductions are limited to income for tax purposes, which is $1,000. Therefore, the home office deduction is $1,000, instead of the calculated amount of $1,080. $80 can be carried forward and used in subsequent years. Investment Options Term Deposit The term deposit is the lowest risk option as the principal investment will never decrease. Low risk also results in low returns. The prime minus 1.5% interest can result in a slow growth for the investment, and potentially zero growth if the prime rate is also 1.5%. The fixed term also restricts access to funds, which can negatively impact expansion opportunities and cash flows. Investors Account This option is also low risk as principal will never decrease, only interest will be earned at a low rate of 1%. The benefit of this investment option is easy access to cash when required. Equity Mutual Fund This option provides a higher level of risk as the principal amount of the investment is not protected. Although the return is appealing, there is potential to lose a significant amount of cash. A positive aspect of this option is the ability to withdraw cash as required.
Municipal Bond This option is the second lowest in terms of risk. The bond provides steady returns, as long as it is not called before maturity. However, if funds are required before the 2 years are complete, the principal of the investment is at risk. Recommendation: It is expected that SGF will require cash often as a growing company, and therefore should invest in an option where cash is readily available and principal is not at risk. Based on this discussion, I recommend SGF invest in the investors account, which provides a return without restrictions on withdrawal and no risk to principal. Contributions Issue: to determine how SGF should account for the various cash and non-cash donations Analysis: Cash from Investors As the donations from investors can only be used towards opening new stores, this donation must be recorded under a restricted fund. ASNPO provides 2 methods to record a restricted contribution: - deferral method: revenue is deferred until related expenses are incurred and offset - restricted fund method: donations are recorded as revenue immediately but in a restricted fund to fairly represent the conditions placed on the use of the donation Recommendation: Due to the small nature of the NPO, and simplicity, it is recommended that SGF uses the deferral method of accounting for cash contributions. Non-cash donations: Can only be recorded when the fair value of the good or service can be estimated and the goods or services would have been purchased, if donation did not occur. 1. Groceries - the fair value of the groceries is an area of uncertainty, as the groceries would have been disposed of, if not donated. This leads to the belief that the fair value of the groceries is nil or close to nil. Otherwise, markdowns in other grocery stores can be compared to determine the fair value. The groceries would have been purchased if the donation did not occur. Because both conditions are met, SGF has the option of recording the groceries as a contribution, or not recording. 2. Volunteer Hours - fair value of hours can be determined by comparing to amount paid to volunteers at similar organizations. Volunteers would need to be hired if they did not otherwise exist. Both conditions are met, which gives SGF the option of recording this contribution.
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