This technical note provides introductory to intermediate accounting and finance students with an introduction to the construction of a discounted cash flow analysis. The scenario is a plausible and moderately complex “real-world” managerial decision of whether or not a business owner should purchase labour-saving farm equipment. This decision includes tax implications and long-lived assets. One of the greatest challenges that managers face is understanding exactly what type of problem they are facing. Before we can learn to invoke and apply the appropriate structure, we have to identify the essence of the problem. The next step is to identify the required information to make the right decision, after an appropriate framework has been applied.
In November 2020, Paul Dietrich was wrapping up his busy harvest season for the 1,100 acres of farmland he currently operated. Although the fall harvest season demanded much of Dietrich’s time and attention, he simply could not ignore an investment opportunity that had been presented to him. A local farmland owner was selling a 150-acre parcel of farmland that adjoined some land parcels already owned by Dietrich. Dietrich estimated that a competitive bid would need to be at least CA$20,000 per acre and the bid would need to be made immediately. He sat down to consider both short-term and long-term impacts on his cash flows.
In November 2020, Paul Dietrich was wrapping up his busy harvest season for the 1,100 acres of farmland he currently operated. Although the fall harvest season demanded much of Dietrich's time and attention, he simply could not ignore an investment opportunity that had been presented to him. A local farmland owner was selling a 150-acre parcel of farmland that adjoined some land parcels already owned by Dietrich. Dietrich estimated that a competitive bid would need to be at least CA$20,000 per acre and the bid would need to be made immediately. He sat down to consider both short-term and long-term impacts on his cash flows.
Kroeker Farms Ltd. (Kroeker) had 500 acres of organic hemp in 2016 and planned to expand to 1,100 acres in 2017. Kroeker was one of the largest producers of potatoes in Manitoba, and hemp had become an important part of the crop rotation on its certified organic land. The agronomist responsible for all non-vegetable crops was looking at two equipment investment options because the equipment currently used for hemp was already at its maximum capacity. The first option was to invest in a new technology—a camera cultivator along with a new air seeder, which had to be imported from Europe. The second option was to simply invest in a larger version of the row-cropping equipment that had been used successfully for hemp on the farm. With the next seeding term approaching quickly, in Spring 2017, he needed to make this decision as he knew if he chose the new technology option, shipping from Europe would add additional logistical and timing concerns.
Kroeker Farms Ltd. (Kroeker) had 500 acres of organic hemp in 2016 and planned to expand to 1,100 acres in 2017. Kroeker was one of the largest producers of potatoes in Manitoba, and hemp had become an important part of the crop rotation on its certified organic land. The agronomist responsible for all non-vegetable crops was looking at two equipment investment options because the equipment currently used for hemp was already at its maximum capacity. The first option was to invest in a new technology-a camera cultivator along with a new air seeder, which had to be imported from Europe. The second option was to simply invest in a larger version of the row-cropping equipment that had been used successfully for hemp on the farm. With the next seeding term approaching quickly, in Spring 2017, he needed to make this decision as he knew if he chose the new technology option, shipping from Europe would add additional logistical and timing concerns.
An analyst is assessing Demand Media’s accounting policies in the face of media scrutiny around its capitalization of media costs as well as some of its non-GAAP disclosures. She has to decide whether it is appropriate to capitalize these costs. In order to do so, she must evaluate whether the costs meet the definition of an asset. After analyzing the company, its business model and its strategy, she can compare its content costs to various other companies that create content (intellectual property); competing accounting policies are also examined. The analyst can then determine the appropriate accounting treatment and whether any adjustments are warranted. With respect to non-GAAP earnings, she can decide whether the metrics proposed by the company are appropriate in order to measure performance.
An analyst is assessing Demand Media's accounting policies in the face of media scrutiny around its capitalization of media costs as well as some of its non-GAAP disclosures. She has to decide whether it is appropriate to capitalize these costs. In order to do so, she must evaluate whether the costs meet the definition of an asset. After analyzing the company, its business model and its strategy, she can compare its content costs to various other companies that create "content" (intellectual property); competing accounting policies are also examined. The analyst can then determine the appropriate accounting treatment and whether any adjustments are warranted. With respect to non-GAAP earnings, she can decide whether the metrics proposed by the company are appropriate in order to measure performance.
An investor wishes to make an investment in a software/information technology company. The investor is intrigued by the growth prospects of firms in the cloud computing industry and is deciding on whether to make an investment in the common shares of Salesforce.com. While the industry appears to be very attractive, concerns have been raised in the financial media over the company's accounting policy decisions, particularly the decision to capitalize software development costs (internally developed intangible assets) and sales commissions. Concerns have also been raised over the company's focus on metrics outside generally accepted accounting principles. Students are asked to evaluate the company's accounting policy choices and are provided with relevant information regarding the company's business model, existing and proposed accounting standards (both under U.S. GAAP and IFRS), and the accounting policies of competitors. After evaluating the accounting policies, students may then conclude whether any adjustments should be made to the financial statements and determine how this impacts valuation.
An investor wishes to make an investment in a software/information technology company. The investor is intrigued by the growth prospects of firms in the cloud computing industry and is deciding on whether to make an investment in the common shares of Salesforce.com. While the industry appears to be very attractive, concerns have been raised in the financial media over the company's accounting policy decisions, particularly the decision to capitalize software development costs (internally developed intangible assets) and sales commissions. Concerns have also been raised over the company's focus on metrics outside generally accepted accounting principles. Students are asked to evaluate the company's accounting policy choices and are provided with relevant information regarding the company's business model, existing and proposed accounting standards (both under U.S. GAAP and IFRS), and the accounting policies of competitors. After evaluating the accounting policies, students may then conclude whether any adjustments should be made to the financial statements and determine how this impacts valuation.
A general contracting company specializing in the construction of single-family homes was known for its exceptional craftsmanship and was, therefore, highly sought after during the busy construction season from late spring to early fall. As a result, clients secured a spot in the company's schedule by paying deposits. This left the company with excess cash during the off-season, which it invested each year in trading investments. The case centres on the transactions associated with these short-term trading investments.
A company that has a fleet of food trucks serving Thai food has issued bonds twice since its incorporation. Because the company has reached a level of maturity and is in the sixth year of operations, it is able to recall a portion of one of the bonds. The other bonds mature. Students are asked to record the transactions related to these bonds.
Financial accounting entries must be made for a small Canadian oil and gas exploration and drilling company headquartered in Edmonton, Alberta, for a project in northern Saskatchewan.
In early February 2009, a radiologist with Community Medical Imaging (CMI), in London, Ontario, was approached by the Timmins District Hospital chief about providing on-call service to Timmins and the surrounding area. The hospital’s current provider had decided to relocate to the United States and could no longer provide service. The chief was hoping CMI could take on the extra workload. The radiologist knew this job would provide interesting work for CMI’s radiologists and would improve CMI’s presence across the province, but simultaneously would place an increased demand, both professionally and personally, on the entire team. Other radiology groups would be interested in this job, so the radiologist needed to accept or reject the job as soon as possible.
As a result of increased concern about common food allergens, a small ice cream manufacturer that sources its cream from local farms has decided to create a secondary manufacturing facility that can guarantee its products to be nut-free. A large investment is required in asset investment and regulatory compliance. The case centres around the bond financing associated with pursuing this expansion opportunity.
A company that has a fleet of food trucks serving Thai food has issued bonds twice since its incorporation. Because the company has reached a level of maturity and is in the sixth year of operations, it is able to recall a portion of one of the bonds. The other bonds mature. Students are asked to record the transactions related to these bonds.
Financial accounting entries must be made for a small Canadian oil and gas exploration and drilling company headquartered in Edmonton, Alberta, for a project in northern Saskatchewan.
A large, well-established telecommunications company headquartered in Vancouver, British Columbia, has decided to begin an overhaul of its infrastructure, beginning with a small pilot project. The case centres around the bonds used to finance this project, the short-term investments made with portions of the bond proceeds, and the company's outstanding common shares.