SharpTaste Inc. (hereafter SharpTaste) was incorporated and began business in March of 20X0. The company’s mission is to provide high quality water, both (1) bottled spring water to individuals and (2) tasty no calorie, flavored waters to individuals and grocery/convenience stores. Sold entirely in the United States, SharpTaste water is meant to help alleviate the obesity problem in the nation, as well as to provide a pleasing, high quality product to all. SharpTaste is executing a strategy of branding its water as a “premium product” available in numerous flavors (as well as the bottled spring water). You are working on the 20X8 audit—your CPA firm’s first audit of SharpTaste. Previous years were audited by another CPA firm.
Approximately 60% of the US population, 180 million individuals, are overweight and considered particularly good “potential customers.” Also, the flavored water market online dieting segment of the market is growing rapidly. The industry includes other “standalone” water providers as well as some “in house” water providers used by the grocery stores. Additional information:
•Founders of company. Throughout its nine-year history, Mr. William Smith has served as chief executive officer. Three of company’s other founders are also officers. The fifth founder, Mr. Jack Adams, served as Chief Financial Officer until mid-20X8 when he left the company. The four individuals now hold all of the stock of the company, with debt outstanding to two banks. The four founders used $1 million in personal funds to purchase and pay for Mr. Adams’s stock, stock which they now hold; they also invested an additional approximately $1.4 million in common stock during 20X8 so as to limit the use of long-term debt. •Board of directors and audit committee: The company’s board of directors is currently composed of the four individuals who remain active in the company; these four individuals also serve as the company’s audit committee; Mr. Smith chairs both the board and the audit committee. Previously, Mr. Smith had also served on the board and the audit committee. With Mr. Adams’s departure, Ms. Jane Jennings, another of the founders, became the company’s CFO. •Competition: The main competitors other than spring water and flavored water providers are soft drink providers, energy drink providers, and beer providers. SharpTaste competes against all markets on the basis of a somewhat high price for a convenient, available tasty product. Although at one point the company’s officersconsidered purchasing a competitor company, neither that acquisition or any other acquisition has occurred. •Deficit: The company currently has a deficit in that retained earnings have a debit balance. This situation is due to large operating losses that occurred in Years 20X4 to 20X6. The founders have increased their stock investments and obtained bank financing to cover losses. •Inventory: Inventory is carried at the cost of production. •Deferred Revenues: These relate to water contracts for individual customers commit to 6, 9 or 12 month contracts to purchase spring water and pay in advance (at a significant discount). •Current economic conditions. The United States economy slumped rather badly beginning in May of 20X8. The situation continues, with the government attempting to stimulate economic activity to higher levels. Sharptaste’s costs for bottled spring water are largely unaffected, but prices of ingredients for its flavored waters have shown increases throughout the past two years.