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Highland Malt: Accounting Policy Choices in Financial Statements

By: Mitchell Stein, Vaughan Radcliffe, Erik Stein

In early 2020, a recent graduate from a prestigious masters of business administration program was working as a financial accountant for a renowned private equity firm in Glasgow, Scotland. For her…

  • Length: 5 page(s)
  • Publication Date: Jun 10, 2020
  • Discipline: Accounting
  • Product #: W20496-PDF-ENG

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In early 2020, a recent graduate from a prestigious masters of business administration program was working as a financial accountant for a renowned private equity firm in Glasgow, Scotland. For her father's retirement, she was considering a gift from Highland Malt Inc.. The company's Scotch whisky was offered in a limited quantity and promoted as an investment opportunity. Unlike ordinary bottled whiskies, Highland Malt Inc. sold this new line solely by the barrel. Collectors had to pay the full amount of CA$10,000 upfront, but could request a full refund within 180 days if unsatisfied with the product. The refund period allowed the collector to visit the distillery and inspect the purchase to ensure it met all expectations. The accountant was wondering if she should proceed with her plan to buy a barrel of Highland whisky as an investment and collector's item for her father.

Learning Objectives

This case can be used in early financial accounting courses at the undergraduate or graduate level. For most classes, this case should be introduced after students attain a basic understanding of Generally Accepted Accounting Principles (GAAP), and are comfortable with some basic concepts of accounting. However, this case is equally effective in introducing concepts to students who are new to accounting and transactions reporting. The case provides an opportunity for students to analyze accounting policy choices and discusses the opening of a new distillery business. It introduces students to a high-level understanding of fundamental transactions and how they are recorded in the company's ledgers. After completion of this case, students will be able to make accounting policy choices and prepare basic financial statements under the various scenarios; understand revenue recognition, capitalization of costs, and inventory valuation using cost-flow assumptions such as first in, first out and last in, first out methods; and understand provision for returns, accounts receivable, and transfer of risk.

Jun 10, 2020 (Revised: Mar 14, 2021)

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Highland Malt Harvard Case Solution & Analysis

Home >> Harvard Case Study Analysis Solutions >> Highland Malt

Highland Malt Case Solution

Key assumptions.

In the annual log; transactions are recorded in the general ledger. It summarizes all debits and credits to each account and calculates the changes within one year. With the exception of the 10 barrels; all the sales are considered cash as revenue sales, which are paid in cash.

All costs listed in Exhibit 4, such as: the administrations, salaries and wages, etc.,are considered as selling, general and administrative (SG&A) costs.

The cost of goods sold (COGS) is calculated on a first-in first-out basis, which means that the batch 1 barrels were sold before batch 2 barrels could be sold.

Highland Malt started its business in 2018, with issuing shares and receiving a total cash injection of $750,000 with an inclusion of the two years’ bank loan of $50,000. In the year 2019, Highland Malt-leased PP&E for $50,000 annually. In the year 2018; the Highland Malt significantly increased its assets by producing inventory at almost $625,000. In addition to this, in the year 2019;the ending inventory was $375,000 with an increase of $100,000 in accounts receivable and in total cash of around $370,000. This increase was balanced with an increase in the liabilities of $80,000 and insignificant retained earnings of $15,000.

In the year 2018; a large part of the inventory could be sold off and the liabilities could be decreased. Looking at the income statement alone, one could say that 2019 was a highly successful year for the company, while in 2018;the company incurred the loss of $5,000. However, the Cash Flow statement shows that majority of the cash was tied up in inventory during 2018. The total cash flow of 2019 was much better than the year 2018.

To analyze the ROE of the company, we can simply calculate for both years:

ROE 2018: net income / equity = - 5,000 / 750,000 = - 0.0067

ROE 2019: net income / equity = 15,000 / 750,000 = 0.02

Recommendations

Looking at the cost structure of Highland Malt; it becomes obvious that the company is facing a significant issue there. This business carries both fixed costs and variable costs. To analyze the costs further; it is necessary to take a deep dive and identify the individual costs and find out if there is an opportunity available for cost-cutting.

Every batch carries a variable cost that needs to be calculated as per barrel cost.The difference in variable costs is due to the fluctuation of prices for barrels. The limited supply of input and the surge of demand for barrels create a major shortage and price increase. This scenario increases the variable costs of around 25% between the company’s first batch and its 4 th batch

Highland Malt has fixed costs that are slightly higher in the first year due to the incorporation, which carry a Marketing expense of $75,000 for the creating of the corporate branding and logo. Next to this extraordinary expense; the Highland Malt has seven different expense categories,which include: Advertising & Promotion.

There is a need to categorize the expenses clearly, and the variable and fixed cost must be separated along with the number of units sold and produced during the year. Doing sowill provide better representation of the profit and loss statement of the company, which can be very beneficial and helpful for the company’s financial analysis in future.................................

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  1. Highland Malt Accounting Policy Choices in Financial Statements Case Study

    Highland Malt: Accounting Policy Choices in Financial Statements - Case Study. Highland Malt Financial Analysis We have made the following assumptions for the Highland Malt case study that while payments are received as ca sh to Spencer, all monies owe d to Highland Malt for sales are considered accounts receivable.

  2. Highland Malt: Accounting Policy Choices in Financial Statements

    In early 2020, a recent graduate from a prestigious masters of business administration program was working as a financial accountant for a renowned private equity firm in Glasgow, Scotland. For her father's retirement, she was considering a gift from Highland Malt Inc.. The company's Scotch whisky was offered in a limited quantity and promoted as an investment opportunity. Unlike ordinary ...

  3. PDF Highland Malt: Accounting Policy Choices in Financial Statements

    Highland Malt Inc. Highland was appropriately located in Dundee, a city in the Highlands of Scotland. As a low volume producer, Highland aimed to differentiate itself from the market through the quality of its whisky. Although competitors traditionally produced Scotch whisky in American bourbon barrels, Highland decided to use

  4. Highland Malt Accounting Case Study

    Highland Malt Inc. Highland was appropriately located in Inverness, a city in the Highlands of Scotland. As a low volume producer, Highland aimed to differentiate itself from the market through the quality of its whisky. Although competitors traditionally produced Scotch whisky in American bourbon barrels, Highland decided to use

  5. Highland Malt: Accounting Case Study

    Accounting Project Highland Malt: Accounting Case Study Financial Analysis and Recommendations Key Assumptions All transactions between Highland Malt and Spencer are paid in Cash in US Dollars. COGS calculations are considered using First in First-Out Method (FIFO). The Lease expenses and fees paid to Adger are considered as Operating Expense ...

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    Highland Malt Case Study - Free download as Powerpoint Presentation (.ppt / .pptx), PDF File (.pdf), Text File (.txt) or view presentation slides online. Scribd is the world's largest social reading and publishing site.

  7. Highland Malt Accounting Case Study

    EXHIBIT 3: HIGHLAND MALT INC. PRODUCTION SCHEDULE AND COST (IN US$) Batch Number Date. Units (Barrels) Cost per Unit Total Cost 1 January 2018 50 $6,000 $300, 2 July 2018 50 $6,500 $325, 3 January 2019 100 $7,000 $700, 4 July 2019 100 $7,500 $750, Total 300 $2,075, Source: Company documents. EXHIBIT 4: HIGHLAND MALT INC. ANNUAL FIXED COST ...

  8. Highland Malt Case Study.pptx

    Highland Malt: Accounting Policy Choices in Financial Statements - Case Study and Financial Analysis Assumptions: • The Payments to Spencer are received in cash, all cash owed to Highland Malt for sales are considered accounts receivable • We are going by the assumption that inventory that has come in first will go out first, which is the FIFO method • Reporting Currency is in US ...

  9. Highland Malt: Accounting Policy Choices in Financial ...

    Product details. Highland Malt: Accounting Policy Choices in Financial Statements. Exercise. -. Reference no. 9B20B013. Subject category: Finance, Accounting and Control. Authors: Mitchell Stein (Ivey Business School, Western University); Vaughan Radcliffe (Ivey Business School, Western University); Erik Stein (Western University) Published by ...

  10. Accounting Case Study

    Accounting. Institution. University Of Chicago. Complete financial accounting case study for Highland Malt with detailed analyses, charts, and financial statements. Preview 2 out of 6 pages.

  11. HIGHLAND MALT ACCOUNTING POLICY CHOICES IN FINANCIAL STATEMENTS Case

    According to the financial ratios & examination of the financial statements; Highland Malt is a very less profitable organization. The return on assets is very less and the overall time to make and continue the barrels is very much lesser, which makes it ales-profit generating organization.

  12. Case Study.pdf

    9B20B013 HIGHLAND MALT: ACCOUNTING POLICY CHOICES IN FINANCIAL STATEMENTS Erik Stein wrote this exercise under the supervision of Vaughan Radcliffe and Mitchell Stein solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying ...

  13. SOLUTION: Highland Malt Inc. Financial Statements Final

    HIGHLAND MALT INC PREPARATION OF JOURNAL ENTRIES AND FINANCIAL STATEMENTS FOR THE YEARS 2018 AND 2019 A] Preparation of Journal Entries a. On its incorporation date the company started off by selling its stock for $750,000 Cash A/c DR. Cr 1-Jan-18 common stock 750,000 25/12/2018 annual loan interest short term loan 50,000 1st jan 2019 ...

  14. Financial Accounting Standards

    Highland Malt: Accounting Policy Choices in Financial Statements. Mitchell Stein, Vaughan S. Radcliffe, Erik Stein, 2020. In early 2020, a recent graduate from a prestigious masters of business administration program was working as a financial accountant for a renowned private equity firm in Glasgow, Scotland.

  15. Highland Malt Case Solution And Analysis, HBR Case Study Solution

    Analysis. Highland Malt started its business in 2018, with issuing shares and receiving a total cash injection of $750,000 with an inclusion of the two years' bank loan of $50,000. In the year 2019, Highland Malt-leased PP&E for $50,000 annually. In the year 2018; the Highland Malt significantly increased its assets by producing inventory at ...

  16. Solved HIGHLAND MALT: ACCOUNTING POLICY CHOICES IN FINANCIAL

    Expert-verified. Share Share. Facts of the question - Malt has a policy to give refund of full amount if barrels are returned within 180 days. - Each Barrel is sold at 10,000$ - A commission of 10% is being paid to Spencer for the Orders he brings in Recognition of revenue …. View the full answer.

  17. SOLUTION: Accounting case study for highland malt

    Project Description Read Highland Malt : Accounting Policy Choices in Financial Statements . Preparebalance sheets, income statements, and cash flow statements for the Years 2018 and 2019 only, and then briefly discuss Highland Malt's financial health and make recommendations for improvements. Note that the main component of this case study ...

  18. Highland Malt: Accounting Policy Choices Case Study

    Highland Malt Case Study - Free download as Powerpoint Presentation (.ppt / .pptx), PDF File (.pdf), Text File (.txt) or view presentation slides online. Scribd is the world's largest social reading and publishing site.

  19. Highland Malt: Accounting Policy Choices in Financial ...

    Product details. Highland Malt: Accounting Policy Choices in Financial Statements. Teaching note. -. Reference no. 8B20B013. Subject category: Finance, Accounting and Control. Authors: Mitchell Stein (Ivey Business School, Western University); Vaughan Radcliffe (Ivey Business School, Western University); Erik Stein (Western University ...

  20. Highland Malt Case.pdf

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  21. Highland Malt Accounting Policy Choices in Financial Statements Case

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  22. Accounting Case Study

    Accounting Case Study - Free download as Word Doc (.doc / .docx), PDF File (.pdf), Text File (.txt) or read online for free. Scribd is the world's largest social reading and publishing site.

  23. Highland Malt Accounting Project.pdf

    View Highland Malt Accounting Project.pdf from ACCOUNTING ENG at University of London. Accounting Project E/MBA Class of Dec 2023 Group #12, EMBA48 Stephanie Joshi [email protected] Iman ... HIGHLAND MALT ACCOUNTING POLICY CHOICES IN FINANCIAL STATEMENTS Ivey Case Study Solution & Analysis. Q&A. Read Highland Malt: Accounting Policy Choices ...