HEC MBA Program

CORE PHASE 2023

January 2023 Intake

ES1, ES2 and ES3

Bach game
Syllabus, Review and Assignments

Last update: January 20, 2023

- Course leader:
- Dr. Vedran CAPKUN, HEC Paris, Department of Accounting and Management Control

- Course instructors:
- Dr. Albert MENSAH, HEC Paris, Department of Accounting and Management Control
- Dr Crystal SHI, HEC Paris, Department of Accounting and Management Control
- Dr. Hervé STOLOWY, HEC Paris, Department of Accounting and Management Control
- Dr. Han WU, HEC Paris, Department of Accounting and Management Control

Ce document ne peut être utilisé, reproduit ou cédé sans l'autorisation d'HEC Paris
 BACH GAME
(Last update: January 20, 2023)

PROFESSOR
Course leader: Vedran Capkun Assistant: Brigitte Madéo
E‐mail: [email protected] E‐mail: [email protected]
Building W2, Building W2, Rm # 41
Ext 9611 Ext 7308

Teaching team: Albert Mensah ([email protected]), Crystal (Yanting) SHI ([email protected]), Hervé
Stolowy ([email protected]), Han Wu ([email protected]).

OVERVIEW
The course is an introduction to Financial Accounting & Reporting designed for business The
principal objective of the Bach business game is for the students to learn how to prepare (and
balance!) the three financial statements used in reporting financial performance and condition
(balance sheet, income statement and statement of cash flows) while understanding the logical
links that connect them. This is done in a dynamic and somewhat uncertain environment.

LEARNING OUTCOMES
When you successfully complete this business game, you should be able to:

- Master the preparation of the three financial statements used in reporting financial
performance and condition (balance sheet, income statement and statement of cash flows)
while understanding the logical links that connect them.
- Understand the difference between period income and end‐of‐period cash balance.
- Understand the mechanism of additions to shareholders’ equity either through the flotation
of new shares or through an incorporation of reserves. In the second ‘year’ of the game,
students find they often need to turn to their shareholders to obtain additional cash capital.
- Understand the role of the professional accounting ‘expert’ (CA, CPA, etc.) and of the
statutory auditor. Generally, for practical reasons, the instructor often plays both these roles
(and more) in this game, although such a practice of merging both functions is absolutely
illegal in the ‘real world’ due to the conflict of interest it creates.
- Understand some rudimentary practices of calculation of product costs.
- Understand the impact of a dividend pay‐out policy on the cash situation and on the balance
sheet.
- Understand the process of negotiation with a banker or lender.
- Understand the issue of valuation of a business.
KEY TOPICS
‐ Session 1: Financial statements: interrelations: The link between the balance sheet, income
statement and statement of cash flows.
‐ Sessions 2, 3 and 4: business game.

COURSE MATERIALS
Required textbook
Financial Accounting and Reporting: A Global Perspective (co‐authored by Prof. Hervé Stolowy
with Prof. Yuan Ding), Cengage Learning, Andover, UK, 6th edition 2020.
This book is specifically tailored for the approach used in this course.
Required cases
You will be provided with a course pack for this course.

TEACHING METHODS
Case study.

PREREQUISITES
First part of the Financial Accounting and Reporting course.

GRADING
Elements in grading

Individual work: Test (open book ‐ no computer) (one hour and a half) 100 points
Total 100 points

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Grading scale

Grading is based on ECTS (European Credit Transfer System):

90‐100 A Pass
75‐89 B Pass
60‐74 C Pass
51‐59 D Pass
50 E Pass
30‐49 FX Fail
0‐29 F Fail

BIOGRAPHY

Albert MENSAH 01 39 67 72 11 / [email protected]

Albert is an Assistant Professor of Accounting at HEC Paris, where he teaches the Financial
Accounting course on the MBA program and conducts archival financial empirical research,
investigating: (i) how firms' mandatory reporting and/or disclosure policies affect the decision‐
making behavior of capital market participants; (ii) how anti‐corruption laws that seek to limit
the influence of money in politics affect the behavior of firms and politicians; (iii) how capital
market participants (e.g., investors, creditors, analysts, suppliers) are making use of alternative
sources of financial data (e.g., big data) in their decision‐making; and (iv) how machine learning
tools can help flag firms that are likely suspects of earnings manipulation. Albert has almost two
decades‐long experience in financial and managerial accounting, both in the classroom (he has
senior high school, bachelor, master and PhD degrees in accounting) and in the industry (he has
previously taught undergraduate students and has also worked as an accounts officer, acting
accountant and consultant). In addition, his current activities (as an entrepreneur) are in the
consumer electronics, Edtech and agriculture sectors in Africa. He is a Certified Public Accountant
(CPA), a Chartered Economist (Ch.E) and a Chartered Financial Economist (Ch.FE).

Crystal (Yanting) SHI 01 39 67 76 95 / [email protected]

Crystal (Yanting) Shi is an Assistant Professor of Accounting and Management Control at HEC
Paris. Crystal holds CPA and CMA credentials. Crystal's research focuses on corporate
governance, which mainly probes how external (e.g., activist hedge funds) and internal (e.g.,
board of directors) corporate governance forces influence a firm's business and social practices
and consequently affect its risk and value. Crystal is very passionate about business sustainability

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studies, particularly regarding an essential social/corporate role: employees. Crystal's work has
been published in leading accounting journals, including Contemporary Accounting Research and
Review of Accounting Studies. Crystal teaches financial accounting in the graduate programs at
HEC Paris.

Crystal received Ph.D. from NYU Stern School of Business, MS in Management Studies from MIT
Sloan School of Business, and both MBA and BA from Tsinghua University, School of Economics
and Management. Before starting her academic career, Crystal worked as the financial controller
for home fashion design company J. Queen New York Inc. and as a public auditor for Ernst &
Young China.

Hervé STOLOWY 01 39 67 94 42 / [email protected]

Hervé Stolowy is a Professor of accounting at HEC Paris. He holds a Degree in Business

Administration (ESCP – Paris), a Masters’ degree in Law (University Paris‐Val de Marne), a B.A. in
Russian and American Studies (University Paris‐Sorbonne), a Ph.D. in Financial Accounting
(University Paris‐Panthéon‐Sorbonne) and an “Habilitation à Diriger des Recherches” (“Qualified
Doctoral Dissertation Supervisor”). He is a certified “expert comptable” (French equivalent of a
chartered accountant or certified public accountant).

He has authored and co‐authored nine books (including “Financial Accounting and Reporting – A
Global Perspective”, Cengage Learning, Andover, UK, 6th edition, 2020, in collaboration with
Yuan Ding and Luc Paugam), chapters in 10 collective works and published over 65 articles in
academic and applied journals (incl. Abacus, Accounting Auditing & Accountability Journal,
Accounting, Organizations and Society, Comptabilité – Contrôle – Audit, Contemporary
Accounting Research, European Accounting Review, Finance – Contrôle – Stratégie, Journal of
International Business Studies, The International Journal of Accounting, Issues in Accounting
Education, Journal of Accounting and Public Policy, Strategic Management Journal). His research
and teaching interests focus more specifically on accounting fraud, whistleblowers and short
sellers, intangibles, non‐financial information and international accounting harmonization. He is
a past president of AFC, a past co‐editor of Comptabilité – Contrôle – Audit, the official journal of
the AFC and a past chair of the Standing Scientific Committee of the EAA, and the past Editor of
the European Accounting Review, the official journal of the European Accounting Association.

Hervé Stolowy teaches financial accounting in the different graduate programs of HEC Paris:
introduction to financial accounting and reporting (HEC‐MBA Program, HEC‐EMBA Program and
HEC Master of Science in Management – Grande Ecole).

Han WU 01 39 67 72 85 / [email protected]

Han WU received his Ph.D. in Accounting and Master in Operational Research at the Norwegian
School of Economics. He spent a year as a visiting scholar in University of California at Berkeley.
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His research is on empirical financial accounting, corporate governance, auditing, and corporate
finance. His current research interests include political connections, media dissemination, large
shareholders, audit firm mergers, and proxy advisors. He has published in academic journals such
as Management Science and Review of Accounting Studies. He teaches financial accounting and
financial statement analysis.

SCHEDULE
Class Learning objectives Required Assignments to Review problems
readings prepare and later and exercises
covered in class
1. Financial statements: interrelations Chapter 3 A 3.3 Schubert R 3.1 Beethoven
The link between the balance sheet, (1) (1)
income statement and statement of pp. 88‐93
cash flows
2. Preparation of the financial A 3.5 Bach
3. statements
4. The link between the balance sheet,
income statement and statement of
cash flows: practice
Final test

ESTIMATED WORKLOAD
Preparation of the first session: 1‐2 hours. The remaining workload takes place “in class”.

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REVIEW PROBLEM & ASSIGNMENTS

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 REVIEW PROBLEM AND ASSIGNMENTS
Review 3.1 Beethoven (1) ...................................................................................................... 1
Review 3.1 Solution to Review Beethoven (1) ...................................................................... 2
Assignment 3.3 Schubert (1) .................................................................................................. 3
Assignment 3.5 Bach.............................................................................................................. 4

Review 3.1 Beethoven (1)

Topic: Link between statement of financial position/balance sheet, income statement, and
statement of cash flows [Income statement by nature]

Beethoven Company, a limited liability company that was incorporated in X0, has a commercial
activity. It buys and sells books and CDs devoted to the learning of foreign languages. (The
founder of the company speaks, fluently, at least ten languages.)

The balance sheet as of 31 December X1 is presented below.

Balance sheet as of 31 December X1 (i.e., before profit appropriation by the general assembly)
(in 000 CU)

Assets (or resources) Shareholders’ equity and liabilities

Non-current assets Shareholders’ equity
Equipment (net value) 800 Capital 710
Equipment (gross value) 1,400 Accumulated retained earnings 300
Accumulated depreciation −600 Net income for X1 (a) 216

Current assets Liabilities

Merchandise inventory 150 Financial debt 110
Trade receivables (b) 400 Trade payables (c) 120
Cash at bank 250 Income tax payable (c) 144
Total 1,600 Total 1,600
(a) To be appropriated at the general assembly to be held in X2: management recommends, and the general
assembly approves, that one-third of year X1 profit be distributed as dividends.
(b) To be received in X2.
(c) To be paid in X2.

The following budgeted activities are envisaged for the year X2 (in 000 CU):

1. Sales revenue budget: 1,600 (of which 1,400 will be received from customers during the
year).
2. Purchases budget (merchandise): 510 (of which 400 will be paid cash to suppliers during
the year).
3. Planned merchandise-ending inventory: 130.
4. Finance budget: repayment of financial debt for 80.
5. Salaries and social expenses budget: 430 (entirely paid before the end of the year).
6. Advertising expenses budget: 250 (entirely paid before the end of the year).
7. Miscellaneous taxes budget (other than income tax): 120 (entirely paid before the end of
the year).
8. Additional non-current assets will be purchased: 300 (entirely paid before the end of the
year).
9. Budgeted depreciation expense on all long-lived assets held at the end of the year: 40.

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The income tax rate is 40% (taxes are recognized in the year of the earnings they pertain to and
are paid in the following year).

Required
Prepare the following proforma (forecasted) documents for year X2: statement of financial
position/balance sheet, income statement, and statement of cash flows.

Review 3.1 Solution to Review Beethoven (1)

Topic: Link between balance sheet, income statement, and statement of cash flows [Income
statement by nature]

Income statement (000 CU) for year X2

Operating expenses Operating revenues
Purchases of merchandise 510 Sales 1,600
Change in inventory of merchandise (B - E) 20
External expenses 250
Miscellaneous taxes 120
Personnel expense 430
Depreciation expense 40
Financial expenses 0 Financial revenues 0

Sub total 1,370 Sub total 1,600

Income tax 92
Net income 138
Total 1,600 Total 1,600

Balance sheet (000 CU) at the end of year X2

Non-current assets Shareholders’ equity
Manufacturing equipment (net) 1,060 Capital 710
Manufacturing assets (Gross) = 1,400 + 300 Accumulated retained earnings 444
Minus accumulated depreciation = 600 + 40 Net income/loss 138
Sub total 1,292
Liabilities
Current assets Financial debts 30
Merchandise inventory 130 Bank overdraft 0
Trade receivables 200 Trade payables 110
Cash at bank 134 Income tax payable 92
Total 1,524 Total 1,524

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 Cash flow budget (000 CU) for the year X2
Cash flows from operating activities
Cash from sales 1,400
Cash from trade receivables (see preceding balance sheet) 400
Purchases for the year −400
Payment of trade payables (see preceding balance sheet) −120
Payment of income tax payable (see preceding balance sheet) −144
Other taxes −120
Personnel expense −430
Advertising expense −250
Financial expense 0
Net cash flows from operating activities (1) 336
Cash flows from investing activities
Investments −300
Other (sale of non-current assets) 0
Net cash flows used in investing activities (2) −300
Cash flows from financing activities
Other (capital) 0
Repayment of debts −80
Dividends paid −72
Net cash flows used in financing activities (3) −152
Net increase (decrease) in cash and cash equivalents −116
(4)=(1)+(2)+(3)
Opening balance (5) 250
Ending balance (6)=(4)+(5) 134

Assignment 3.3 Schubert (1)

Topic: Link between statement of financial position/balance sheet, income statement, and
statement of cash flows [Income statement by nature]

The Schubert Company is a small-sized business that makes and sells computers on a limited
national market. The balance sheet as of 31 December X1 is presented below.

Balance sheet as of 31 December X1 (i.e., before profit appropriation by the general assembly)
(in 000 CU)

Assets Shareholders’ equity and liabilities

Non-current assets Shareholders’ equity
Equipment (net value) 600 Capital 500
Equipment (gross value) 900 Accumulated retained earnings 200
Accumulated depreciation -300 Net income for X1 (a) 168
Current assets
Inventories:
• Raw materials and components 80 Liabilities
• Finished products 120 Financial debt 100
Trade receivables (b) 140 Trade payables (c) 110
Cash at bank 250 Income tax payable (c) 112
Total 1,190 Total 1,190
(a) To be appropriated in X2 by the general assembly: management recommends, and the general assembly
approves, that one-half of the profit of X1 be distributed.
(b) To be received in X2.
(c) To be paid in X2.

The following budgeted (anticipated) activities are considered for period X2 (000 CU):

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1. Sales revenue budget: 1,300 (of which 1,090 will be received from customers during the
year).
2. Purchases budget (raw materials): 520 (of which 380 will be paid cash to suppliers during
the year).
3. Rental expenses budget: 220 (entirely paid before the end of year).
4. Estimated property taxes: 100 (entirely paid before the end of year).
5. Remunerations and social charges budget: 400 (entirely paid before the end of year).
6. Financing budget: repayment of financial debt for 70; interest expense for the year: 10
(entirely paid before the end of year).
7. Investment budget: acquisition of non-current assets for 200 (entirely paid before the end
of year).
8. Total depreciation expense budget for all non-current assets (new and old): 20.
9. New shares will be floated on 1 January X2; the net proceeds, all in cash, amount to 100,
received from old and new shareholders.
10. Budgeted ending inventory levels:
▪ Raw materials inventory: 130
▪ Finished products inventory: 140.

The income tax rate is 40% (taxes are recognized in the year of the earnings they pertain to and
are paid in the following year).
Required
Prepare the following proforma (forecasted) documents for year X2: statement of financial
position/balance sheet, income statement, and statement of cash flows.

Assignment 3.5 Bach

Topic: Link between statement of financial position/balance sheet, income statement, and
statement of cash flows

1 – Introduction

Bach Company is used in a simulation exercise, carried out in teams. It is intended to give
realistic training in the use of accounting and financial statements for decision making, use of
concepts, language, and the preparation of financial documents. To this end, the participants in
the simulation are expected to prepare statements of financial position/balance sheets, income
statements, and cash flow budgets/statement of cash flows deriving from their decisions. All
decisions, notably production and sourcing volumes, are made on a yearly basis and, once
decided on, are not modifiable. Although each team decides on its intended sales volume (and
all corollary decisions to make this estimation materialize) the actual volume of sales is not
selected by the team and is determined externally, for each team, by the instructor.

2 – Your company and its market (each firm operates under these conditions)

On 1 January X7, each team takes responsibility for the management of a firm called Bach-n,
where n is the identifier of the team. On day 1 of period X7, all Bach Co firms in the simulation
are identical to all the other ones. Each firm is a rather small-sized business. It designs,

4
assembles, and sells portable solar batteries on a limited domestic market. At the beginning of
the simulation, the market is shared equally between five companies, all of similar size.1

The batteries produced are ultra-high capacity. When fully charged, each battery can charge
smartphones and tablets repeatedly. Besides, each battery can charge multiple devices
simultaneously, which is very convenient. It is a very useful tool for traveling, working, hiking,
camping, etc. Bach game companies have therefore specialized in the manufacture and sale of
a very high-end product.

The overall market for the year X7 is estimated to be about 500,000 units.2 It is reasonable to
anticipate that the total market size will increase or decrease, beyond X7 at a trend average rate
of about x% per year (where x is decided by the instructor), but this will depend on the decisions
taken by each firm in such matters as the selling price and its evolution for the firm, advertising
and marketing expenses, and so on. The market is extremely sensitive to prices and to marketing
expenses. In a down market, for example, the firm with the highest marketing and sales
expenses might see its market share grow, and, maybe, even its sales volume grow, even if the
overall market is shrinking.

3 – Manufacturing equipment (same initial conditions apply to each firm)

On the opening date (1 January X7), the production capacity of each firm consists of nine
assembly lines. Each one can assemble a maximum of 10,000 portable solar batteries per year.
An additional assembly line would represent an investment of 50,000 CU. It would be
depreciated over five years using the straight-line method, which implies a yearly depreciation
expense of 10,000 CU for each new line acquired. Old lines, in this fictitious world with no
inflation, were acquired, at different times, at the same price of 50,000 CU per line. They have
been depreciated using the straight-line method on the basis of a useful life of five years.

The existing equipment (nine assembly lines) is broken down, for each company, as follows
(values are in thousands of CU):

# of Years Gross value Accumulated Net book

lines operated Depreciation value
2 Lines 4 years Their (2 × 50) − (2 × 40) = (2 × 10)
which accounting
3 have 3 years book (3 × 50) − (3 × 30) = (3 × 20)
3 already 2 years value is (3 × 50) − (3 × 20) = (3 × 30)
1 operated for 1 year therefore 50 − 10 = 40

Each company may invest (on 1 January of each year) in as many new assembly lines as it feels
is necessary to achieve its business plan. Each new assembly line is operational immediately in
the period of purchase. All purchases are assumed to take place at the beginning of the period
and therefore a new line increases the capacity of production by 10,000 units. Once an assembly
line is fully depreciated, it is scrapped and has neither residual value nor production capabilities.

1 The number of teams in the simulation will, in fact, vary according to the number of participants. The average
quantity of units potentially sold by any firm is always 100,000 in the first period. Thus the market potential in
period X7 is equal to the number of teams multiplied by 100,000 units.
2 This number is adjusted on the basis of the number of teams.

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4 – Inventories (same initial conditions apply to each firm)

To assemble portable solar batteries, companies source raw materials: mini solar panels, which
transform sunlight into electricity, lithium batteries used to store the electrical energy produced
by solar panels and various supplies (electrical circuits, which unite the solar plates and the
lithium batteries, packaging, etc.). The cost of solar plate panels and lithium batteries is €14 per
unit in X7 and the cost of supplies €4 (total cost of raw materials: €18). These prices may be
reviewed by the suppliers.

On 1 January X7, each company holds an inventory on solar plates and lithium batteries, which
allows the production of 10,000 portable solar batteries without any additional purchases. In
addition, each company has 5,000 finished portable solar batteries in inventory, ready for
delivery, whose unit direct cost (materials and labor) amounts to 27 CU, calculated as follows:

Solar plate and lithium battery, per unit 14

Supplies, per unit 4
Direct labor
• Annual salary cost of one worker 18,000 CU
• Number of portable solar batteries made in a year (per worker) 2,000
→ Labor cost of one battery 9
Total direct cost 27

5 – Personnel (same initial conditions apply to each firm)

As of 1 January X7, 50 employees are working on the production lines in each firm. Each
worker can normally assemble up to 2,000 portable solar batteries in a year. As far as production
is concerned, each company can hire additional personnel or dismiss redundant workers. Every
dismissal must first be notified to an inspector from the Ministry of Labor, who may refuse the
layoff, and will be subject to the payment to the worker of a cash indemnity equivalent to four
months’ salary. No social charges will be applied to this indemnity. Dismissals are presumed
to take place at the beginning of the period in which they take place. (The indemnity is
consequently based on the salary before any increase.)

In X7 the minimum annual salary is 12,000 CU per assembly worker. In addition to the salary,
the employer must pay social charges (health care, retirement, unemployment, vacations, etc.)
amounting to 50% of the employee’s remuneration. Thus the total labor cost incurred by the
firm is 18,000 CU per year for each employee. In the second period (X8), the management of
each company is free to raise the base pay by whatever amount it feels is necessary.

Management, selling, and administrative personnel as a whole receive a total remuneration

amounting to 200,000 CU per year in X7. Once social charges are added at the rate of 50%, the
payroll cost to the employer for management, selling, and administrative personnel is 300,000
CU. This category of personnel will benefit from any percentage increase granted to production
workers. Thus, the per person payroll cost for both assembly production personnel and
management, selling, and administrative personnel would increase, in a firm, by the exact same
proportion if a raise were decided by management. The management, selling, and
administrative personnel fulfills essential functions in the company and cannot be dismissed,
regardless of the level of activity. Unlike the manual labor used in assembly work, this category
of personnel uses a lot of computerized and automated routines and could handle a significant
increase in the workload without requiring any new hiring.

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6 – Financing (same initial conditions apply to all firms)

The opening balance sheet shown below indicates that the shareholders have paid in 250,000
CU of share capital and that the company has realized profits in the past since the accumulated
retained earnings amount to 110,000 CU.

A debt of 200,000 CU was contracted in the first days of X4 with interest payable at the annual
rate of 8%. It is repayable on 31 December X8. The interest is due every 12 months on the last
day of the accounting period. The amount of any new (medium- or long-term) debt a firm may
require for its planned activities would have to be negotiated in light of justified needs.

The banker(s) or the shareholders must pre-approve any request for additional debt financing
or issuance of new capital. Their final decision can only be taken after they have been provided
with the firm’s proforma financial statements and they have been able to review the financial
situation of the company.

‘Temporary’ financial needs can be covered by short-term overdrafts granted by the bank.
Interest is charged at the rate of 10% on the amount of overdraft calculated on the last day of
the accounting period and is payable immediately.

Balance sheet as of 31 December X6 (before appropriation of the X6 earnings by the general

assembly)
(000 CU)

Assets Shareholders’ equity and liabilities

Non-current assets Shareholders’ equity
Manufacturing equipment (net) 210 Capital 250
Gross value 450 Accumulated retained earnings 110
Accumulated depreciation −240 Net income X6 (to be appropriated in X7) 90
Current assets
Inventories Liabilities
Components and parts (18 × 10,000) 180 Debt 8% X4 (principal due on 31/12/X8) 200
Finished products (27 × 5,000) 135 Trade payables 235
Trade receivables 350 Income tax payable 60
Cash at bank 70
Total 945 Total 945

7 – Other purchases and external expenses (yearly amounts, applicable to each firm)

▪ Each firm rents its factory buildings for 300,000 CU per year. (The offices of the
administration and sales team are generously provided for free by one of the firm’s major
shareholders.)
▪ Property taxes (not income related) amount to 40,000 CU.

The amount of other expenses, such as advertising, marketing, and promotion expenses, will
result from the team’s decisions. For the sake of simplicity in the simulation, expenses of this
nature are aggregated into a single line item and in this example represent a small percentage
of total costs (before the inclusion of advertising expenses). Future sales are sensitive to the
level of spending for market development and maintenance.

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8 – Credit conditions (same initial conditions apply to all firms)

Investments in manufacturing equipment, all personnel expenditure, other purchases, and

external expenses are paid in cash during the accounting period concerned.

The company pays 90% of the value of the purchases of solar plates, lithium batteries and
supplies in cash in the period concerned and the remaining 10% (debt to suppliers) are paid in
the immediately following period.

Customers pay the company 85% of the invoiced value of the sale in the period during which
delivery takes place. The credit sales amount is therefore 15% of sales revenue. Credit sales are
included in trade receivables and will be settled in the following accounting period.3

9 – Income tax and dividends (same conditions apply to all firms)

If the income statement shows a profit, it is assessed for income tax purposes at a rate of 40%.
The amount of income tax is rounded to the lower 000 CU. Income tax is due to the state at the
end of the year and paid during the following year. No fixed minimum income tax is due when
the company incurs a loss. Unlike in the real world, losses in previous years cannot be used to
offset current taxable income.

The net after-tax income may be distributed wholly or partially as a dividend to shareholders.
The amount of the dividend (if any) distributed during any year cannot exceed the income of
the preceding year, i.e., it has been agreed by shareholders that once earnings have been
retained, they should not be distributed.

10 – Decisions to be taken by the Board

See Appendix 1.

11 – Procedure for a one-year simulation

A – Prepare the batch of budgeted documents (proforma balance sheet, income statement, and
statement of cash flows) to test the validity of your decisions (see Appendix 2).

B – Hand in your decision sheet to the instructor.

C – The instructor will advise each firm of the volume of its actual sales for the period. This
amount is a maximum figure. If a business has not planned to produce enough to meet the
revealed demand, that firm’s sales will be limited to the quantities available for shipment
(production of the period plus available beginning inventory). The calculation of the potential
maximum sales available to any firm reflects the decisions taken by both the firm itself and its
competitors.

D – Once each firm knows its actual demand, each management team will prepare the resulting
definitive accounting documents (statement of financial position/balance sheet, income

3The percentages of receipts and payments were different in X6. The reader should not try to ‘guess’ sales and
purchases from previous periods.

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statement, statement of cash flows), which will be presented to the shareholders. These
documents have to be certified by the statutory auditor (see Appendix 2).

The instructor can ask the student teams to present the income statement either by nature
(Appendix 2a) or by function (Appendix 2b). All the necessary information is included in the
text of the case and the ready-lined Appendices 2a and 2b can help the students. For the sake
of simplicity, because we are dealing with a multi-period situation in this exercise, rather than
entering into cost accounting discussions, we choose to consider that all depreciation is charged
to the income statement as a single item after all other operating expenses, and that unit
manufacturing cost is, thus, essentially comprised of only materials and labor.

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NAME OF THE FIRM YEAR
BACH __________________

Appendix 1: Decision Sheet (these decisions are not modifiable once handed in)

1 Sales

1.1 Unit selling price (in CU)

1.2 Quantities you intend to sell

2 Production

2.1 Investment (number of acquired new assembly lines)

2.2 Number of operational assembly lines: existing lines at the end of the previous
period minus fully depreciated lines at the end of the previous period plus newly
acquired lines = number of productive lines available this period

2.3 Production you will launch (quantity of portable solar batteries)

2.4 Outside purchases of solar plates, lithium batteries and supplies (quantity)

2.5 Consumption of solar plates, lithium batteries and supplies (quantity) (hopefully
equal to quantity in 2.3)

3 Personnel

3.1 New hires (number of persons)

3.2 Personnel dismissed (number of persons)

3.3 Annual total remuneration (excluding employers’ social security charges, in

000 CU per assembly worker [remember to include any salary increase, if
applicable]

4 External expenses (in 000 CU)

4.1 Budget for advertising, marketing and promotion

4.2 Auditing fees (of the past year)

5 Dividends and others (in 000 CU)

5.1 Dividends distributed

5.2 Profit not distributed (and transferred to retained earnings)
5.3 Increase of capital in cash (on the basis of approval by shareholders)
5.4 Increase of capital by incorporation of retained earnings (on the basis of
approval by shareholders)
5.5 New debt received (according to agreements made)
5.6 Interest expense on bank overdraft (of the past year)

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FIRM: BACH ___________________ Appendix 2: Summary financial statements (Income statement by nature) YEAR

CASH FLOW BUDGET/STATEMENT (in 000 CU) INCOME STATEMENT (in 000 of CU)

Opening balance (1) Operating expenses Operating revenues

Cash flows from operating activities
Cash received from sales: 85% of sales revenue Purchases of raw materials Sales
Cash received from trade receivables (see preceding balance Change in inventory of raw materials (B-E) Change in inventory of finished products (E-B)
sheet) External expense (Where E = ending and B = beginning)
Cash paid for purchases: 90% of annual purchases Taxes (other than income tax)
Cash paid for trade payables (see preceding balance sheet) Personnel expense
Income tax payable Depreciation expense
Taxes (other than income tax)
Personnel expense Financial expenses Financial revenues
Rent expense
Advertising expense
Auditing fees
Financial expenses Subtotal Subtotal
Income tax expense
Net cash flows from operating activities (2)
Net income Net loss
Cash flows from investing activities Total Total
Acquisition of production lines
BALANCE SHEET (in 000 of CU)
Net cash flows used in investing activities (3) Assets Beg + - End Equity and liabilities Beg - + End
Non-current assets Shareholders’ equity
Cash flows from financing activities Manufacturing equip. (net) Capital
Increase in capital Accumulated retained
New debt earnings
Repayment of debt Current assets Net income/loss
Dividends paid Inventories Subtotal
• Raw materials
• Finished products Liabilities
Net cash flows used in financing activities (4) Trade receivables (15% of Debt 8% X4 (due end of X8)
sales revenue)
Bank overdraft
Net increase (decrease) in cash (5)=(2)+(3)+(4) Cash at bank Trade payables (10% of
purchases)
Income tax payable
Ending balance (6)=(1)+(5) Total Total

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