Beauty Boost (BB)
In 2010, Anthony Mascolo opened a series of spas and created his own line of beauty products.
The company manufactures the beauty products in a plant in Millet, Alberta. By year-end
October 31, 2013, the company had expanded considerably. The preliminary 2013 statement of
earnings, and comparative statement of financial positions for 2012 and 2013, are presented in
Anthony Mascolo is involved in discussions with his auditor over the revenue recognition
policies used by the company. The company earns revenue from spa treatments and sales of
beauty products both at the spa and through independent distributors. BB also sells gift
certificates for its services and products. All of the beauty products are sold with the guarantee
that if the customer is not completely satisfied, the product can be returned within 30 days for a
full refund. In 2013, BB sold product lines, which were initially developed in 2010 and have
been well tested on the market, and several new product lines sold for the first time in 2013.
The following chart provides a breakdown of the revenue figure of $11,000 (all amounts
reported in thousands of $) reported in BB’s statement of earnings for the year ended October 31,
2013, along with the revenue recognition policies used for each line item:
Item Amount Revenue Recognition Policy
A. Spa services* $5,000 After completion of the service
B. Products developed in 2010* 5,000 At point of sale; sales returns and allowances
estimated and recorded based on reliable
historical rates of return
C. Products developed in 2013* 500 At point of sale; no sales returns and
allowances recorded as unable to estimate
D. Gift Certificates 500 At point of sale
*except for products/services provided as a result of gift certificates
Of the $5,000 sales of products developed in 2010, $2,000 retail value of goods was shipped to
independent distributors in the final days of October. This amount represents “surplus”
inventory for the distributors (that is, it is over and above the amount they would normally
stock). BB asked them to accept these goods “to free space in the BB shipping areas” and told
Page 1 of 4 the distributors that they need not pay until they sold the goods, which they could return for a full
refund in November if they so wished.
The major costs associated with the spa services are the salaries of the employees and the cost of
products used. Salary is expensed as accrued, and products are expensed in the year that they are
used through maintenance of a periodic inventory system. For an average spa treatment, costs
equal 40% of the amount charged to the customer. For products developed in 2010, cost
represents approximately 25% of the selling price, while for products developed in 2013, the
costs represent 30% of the selling price. These costs are expensed when the revenue for the
service or sale of the goods is recognized.
The products developed in 2013 did not become available for sale until October, the final month
of the fiscal year. The major product line developed in 2013 is a tanning lotion, the application
of which is intended to simulate a natural tan. Anthony Mascolo was anxious to bring this
product to market, and it was not tested as thoroughly on all complexion types as was typical for
the company’s earlier products.
50% of the dollar value of all gift certificate sales for the year was for spa services and 50% was
for products developed in 2010. 70% of the spa gift certificates and 80% of the product gift
certificates sold in 2013 have also been used in 2013. (Assume there were no outstanding gift
certificates from previous years.) Salaries and products associated with the gift certificates are
expensed when the gift certificate is used.
BB has provided for bad debt expense in the 2013 statement of earnings (included as part of
general and administrative expenses.) Collections have not typically been a problem for the
Cash Flow Statement
Anthony Mascolo is pleased with BB’s growth. He gave himself a substantial raise in 2013 (see
statement of earnings), purchased a 20% stake in Catwalk Hair Care (CHC), and wants to expand
further in 2014. In order to do this, he has to negotiate a loan with the bank. He is therefore
anxious that the company appear to be as profitable in 2013 as possible. The Bank is requiring
financial statements in accordance with IFRS standards. He also requires your help in
completing a statement of cash flow for the year ended October 31, 2013. Additional
information necessary for the completion of this statement follows:
1. The “Due from shareholder” account represents money Anthony Mascolo borrowed from
the company for personal use.
2. New equipment was purchased in 2013. No dispositions of equipment were made during
3. The decrease in the patent account is exclusively due to amortization.
4. BB purchased its 20% stake in CHC entirely by issuing shares of its own stock. BB did
not issue any other capital sto