How to Do a Case
To: Haddock’s Union party
From: Financial advisor
Re: effect on cash flow from following Issues: Revenue recognition, accounting
for securities, treatment of research vs. development costs, investments, Bank
covenants, tax asset, disclosure issues, expensing-.
My role is to be a financial consultant to the union leaders of Haddock. They are
interested in knowing the true cash flow of company in the short and long term to assess
whether or not the company is capable of meeting their demands. The users of the
analysis are not sophisticated users and must be presented with simple explanations and
relevant information to avoid confusion and to ensure proper use of recommendation.
The company is a privately owned company operating since 1966. The current union
agreement is to expire on April 30, 2002 ( in 2 months) and he union is demanding a
three year contract with a 10% increase is salary and a $5000 bonus for each employee
(Haddock has a 100 employees).
Discuss all related industry facts that will contribute to the case.
Users and Objectives (state objective and why):
Owners: will want to maintain internal control and minimize taxes while maximizing
profits. Also, along with profit maximization cash flow prediction is important to make
the business more attractive to creditors for lending money. Lastly it is important for
owners to perform management evaluation.
Management: Management will be interested in tax minimization and performance
evaluation. Profit and bonus maximization are the main concerns.
Tax Authority: the CRA wants to ensure taxes are being paid fairly.
Bank: The bank has placed a covenant: the business must maintain a current ratio of
1.2:1. Cash and collateral are also very important to the bank. The bank will also be using
the financial statements to access performance evaluation of the company. Largely,
interest lies in valuating assets/ collateral as well as liquidity of the company.
Union: The union leaders want to know the fair cash flow to see if the company is
capable of meeting their demands. They will want to see a positive cash flow as well as.
Cash flow analysis is the main financial statement they are interested in.
Ranking of Users and Objectives The primary objective of the Union is to have their demands met and to see a positive
cash flow in order to access if the company has the means to meet their demands. This
report is written keeping in mind the union party’s objective since this is why they have
come to me for advice.
The primary objective of the company’s financial statements will be to satisfy the debt
covenant placed by the bank. Debt covenants if present are very important to satisfy and
are the primary objective of the company.
The management’s primary objective is to maximize profits and bonuses
Haddock Fisheries Inc. is a private company owned by Jack Cod with no plan of going
public in the near future. Under normal circumstance, there is no constraint in terms of
how the financial statements are prepared. However, due to the loan which Haddock has
acquired from the bank to finance its investment, Haddock Fisheries would have to
provide the bank with audited financial statements using IFRS.
1. The wage increase and the signing bonus and its effect on the company’s cash
The wages expense for the fiscal year ended in 2002 is $3,000,000. The union official is
asking for a contract with a 10% annual wage increase in the following three years plus
an upfront signing bonus of $5,000 for each of the 100 employees. The total cash outflow
and wages to be paid by the Haddock Fisheries if the union were to succeed in securing
the contract would increase to $3,300,000 (wages) + $500,000 (signing bonus) =
$3,800,000 to be paid to employees in 2003. In the following two years, $3,630,000 is
the total to be paid in wages in 2004 and $3,993,000 is the total to be paid in wages in
2. Sales and returns:
Customers who have purchase Haddock’s product have a typical payment terms of 60
days. Within that period, customers are allowed to return Haddock’s product for a refund
or discount in the event that they are dissatisfied with the products. The accounts
receivable balance net of allowance for uncollectible and sales return amount total
$5,750,000. Haddock’s would be able to collect that amount in the next 90 days if no
returns for refunds or discounts occur. However, this amount could vary based on the
company ability’s to predict the collectability of the amount owed under accounts
receivable. The current ratio bank covenant should be kept in mind and payables should
be deferred in the best interest of maintaining this condition.
3. Bank loan and current ratios to be maintained by Haddock:
The bank which has provided the loan to Hadd