Hair Accessories Inc - Case Question PDF

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HAIR ACCESSORIES INC. Hair Accessories Inc. (HAI) is a retail store that specializes in hair accessories for teenage girls. Ms. Cashgrab started the company four years ago and now has five stores in various shopping malls across Canada. The retailing of hair accessories is highly competitive, with average selling prices determined by the market. As a result, a company’s success depends heavily on the effectiveness of its cost control procedures. During the first two years of operations, the growth of HAI was rather stagnant. It was having difficulty controlling costs, and this had an adverse impact on its overall profit margins. So two years ago, Ms. Cashgrab decided to hire Mr. Cheap, a director with extensive experience in cost management. Since this hiring, HAI has grown tremendously as a result of the various cost-cutting measures introduced by Mr. Cheap. Ms. Cashgrab is very happy with what Mr. Cheap has done for HAI and has decided to give him a hefty raise. As part of the new compensation package, he will be entitled to a bonus based on 10% of the company’s net income, beginning with statements for the year ended April 30, 2013. HAI’s accountant has recently retired. Ms. Cashgrab has hired you to advise on the appropriate accounting policies for the events that have occurred during the year ended April 30, 2013. She has asked you to prepare a report on the appropriate accounting treatment for the following items: 

To stimulate sales, in December 2012, HAI starting selling items on the internet and initiated a “satisfaction guarantee program” whereby the company would allow its internet customers to return their purchases one year after the initial purchase date, as long as the hair accessories were in their original condition. All internet customers pay by credit card. As of April 30, 2013, total internet sales were $200,000.

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HAI spent approximately $100,000 during the year advertising in a prestigious magazine. The $100,000 included the cost of designing and producing the ads. According to the store managers, more people have been coming into the stores since the ad campaign came out.

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On April 22, 2013, $40,000 worth of Rihanna hair clips was delivered to HAI. These hair clips are popular among teenage music lovers and priced to sell at $8/clip. On May 3, 2013, MuchMusic TV ran a news story declaring “Rihanna a thing of the past – lost popularity”. In response to the news story, HAI is expecting reduce its prices on all 10,000 clips, selling them somewhere in the range of $4.50-3.50/clip.

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On April 25, 2013, the cash register broke at one of the HAI stores. A repairperson completed the repairs to the cash register within hours of it breaking-down. Repairs consisted of replacing a wornout magnetic strip used to print receipts. Each magnetic strip can be used to print between 10,000 – 12,000 receipts. To pay for these repairs, HAI issued a cheque for $1,200 on May 15, 2013.

Before considering the above transactions, HAI’s net income for the period ending April 30, 2013 is $1,000,000. © Carl K.L. Ching (adapted by Alex Fisher 2013)...