Accounting Theory

Abstract

The case study: Cool Waters Year in Review 2008 is a comprehensive case study of an actual firm that is currently operating in Trinidad and Tobago. The Cool Waters case touches aspects of both financial and managerial accounting at an advanced level, as well as decision-making at an advanced managerial level. Although it is predominantly fictional, it is based on a number of actual events that took place within the local firm. The case material was prepared for students who are currently in Final Year BSc Accounting Major and Accounting Special, and is also appropriate for Level II ACCA students. The objectives of this case would be to test the ability of students to recognise and understand the relationship between a parent company and its subsidiary’s assets, the advantages and disadvantages of leasing versus buying capital assets, break even analysis for a multi-product firm, capital allowances and choice of investment for the future changes in market conditions. Further, it tests the students’ ability to think outside the box, by bringing in several conditions and considerations that are implicitly mentioned in the case material. This case study is ideal for students to be done in groups of three to five persons. It is sufficient enough for students to complete within a two-week period, given additional course requirements, and semester workload. Ideally, the case should be assessed out of 45 marks, with 40 marks going to case analysis and 5 marks going towards presentation.

Keywords: Parent-Subsidiary, Buy versus Lease, Break Even Multi-product firm, Capital Allowance.

CASE STUDY: COOL WATERS YEAR IN REVIEW 2008

Introduction

Cool Waters Products Limited, the largest and most modern water plant in the Caribbean was established in 1999. From the initial stage of blowing bottles to marketing the product aggressively both locally and regionally, Cool Waters Products Limited continues to grow as each year goes by. Starting with 12 employees, including only one salesman, the accomplishment of the company has been tremendous. The company’s products include 500 ml pouches, 650 ml regular, 650 ml Sports, 1.5 Litres, a new and improved 1 Gallon package, 5 Litres as well as 5 Gallon Bottles that are used for our Water Coolers that can be bought or rented. Last but not least, Cool Waters Products Limited strives on giving the best quality water along with the best service to you our customers. Be assured that our water is tested on a weekly basis from CARIRI (Caribbean Industrial Research Institute) and meets the high requirements of the IBWA (International Bottled Water Association).

Start 2008

The financial year of 2008 for the Cool Waters Company started of with several hurdles, which saw the business being in the public business forum, even to point where it grabbed local headlines by being the subject of a national Parliamentary Debate. The following are excerpts from several articles in the local press, about a simple business transaction, which saw Cool Waters being linked to a controversial portion of prime agricultural land. �The Finance Minister and Agriculture Minister must use the first sitting of the Parliament to tell the nation the exact terms of the reported multi-million-dollar deal that saw Cool Waters Products buying Pierre Renee Trinidad Ltd and inheriting the long-term lease of 450 acres of State land.’ From the article: �Explain Cool Waters’ buyout of Pierre Renee’ By P. Boop Trini-Guard, Sunday 25th November 2007. �At the February 22 sitting of the Senate, Opposition Chief Whip said he had information that Cool Waters had taken over the PR lease and intended to set up a soft drink factory at the Lime Grave Estate’. From the article: �No permission to build bottling plant’ By P. Boop Trini-Guard, Sunday 2nd March 2008. The deal was supposedly between the Parent Company, which owned Pierre Renee, and Cool Waters ltd, where it was alleged that Cool Waters made a 100% share purchase of Pierre Renee ltd. Further it was Pierre Renee that held the long term lease from the government for the 450 acres. However, these are unconfirmed reports, as no one from Cool Waters was available for comment.

Current Operations

Cool Waters ltd, has constantly been the industry leader, and consequently has had to keep expanding its operations over the years to keep up with the changing market conditions. Current market predictions as shown in Table 1 below would require Cool Waters to expand its operations to maintain its position as a dominant market player in terms of market share. Currently, Cool Waters enjoys a healthy sustained share of the market of approximately 75% of the local market for bottled water.

YEAR MARKET SIZE IN '000 BOTTLES

2008 620

2009 650

2010 700

2011 725

2012 750

2013 700

2014 680

2015 630

2016 600

Table 1. Projected Size of the Bottled Water Market for Trinidad

Market Conditions

Currently the market for bottled water has slowed its rapid growth over the years, to a more leisurely pace growth rate locally. Figure 1 below, shows a market trend analysis for the bottled water industry in Trinidad and Tobago. With a medium sized distribution fleet, the company continues to be successful, especially where the regional market is concerned, exporting to Antigua, Barbados, Jamaica, St. Lucia, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Martin, Suriname and Tobago. However, with the expected rise in shipping costs and freight expenses, it is expected that growth in those markets would slow in the near future.

Company Expansion

Currently in the pipeline is a master plan for the expansion of the company, which would increase output from current production of 600,000 bottles to around 900,000 bottles per year. The new state of the art factory would be located in the controversial Lime Grave Estate at an estimated overall cost of $45 million. The estimated delivery date for the factory would be in November 2009 with operations starting in January 2010. It is approximated that the new