Peter MacDonald EAC649 Winter 2019

STAMPS IN CANADA

Stamps in Canada (SIC) is a bimonthly (six times a year) magazine aimed at Canadian
stamp collectors. It was started in 1998 by Claude Geoffrion, a self-made millionaire and
enthusiastic philatelist. He ran the magazine as a hobby, and was happy if the magazine
broke even or incurred only a small loss; his main goal was to be able to spend time on
his favourite hobby and to communicate with other philatelists. Geoffrion covered any
cash shortages from his own pocket and spent any surpluses on his hobby.

Geoffrion did most of the writing and photography himself. He promoted magazine
subscriptions to readers through stamp shows, small ads in other publications aimed at
stamp collectors, and renewal notices to current subscribers; despite this minimal effort,
SIC currently has 10,000 subscribers who pay $25 for their annual subscriptions.
Geoffrion found, to his surprise, that stamp dealers were willing to pay to advertise in
SIC; annual advertising revenues in 2017 amounted to $160,000. Table 1 (attached)
summarizes SIC’s 2017 cash flows.

Early in 2018, Geoffrion decided to stop publishing SIC; he found that it was taking up
too much of his time and, in today’s difficult economic environment, he needed to
concentrate on his core businesses. Besides, Geoffrion was old-fashioned; he had no
desire to put the magazine online, which many of his subscribers and advertisers told him
they wanted.

When Carol Singh, a Toronto entrepreneur and stamp collector, heard about Geoffrion’s
plans, she saw an opportunity to get involved with magazine publishing, an industry that
she had always been interested in. Singh owned a small advertising and promotion
company, and she was confident that she could use her marketing expertise, her
experience in running a growing company, and her interest in stamps to build SIC into a
nicely profitable magazine.

Singh paid Geoffrion $60,000 for SIC, incorporated the company, and started to work on
a formal business plan. She quickly realized that she would need to invest money in
promotion and website design to increase the magazine’s circulation to attract more
advertising; she estimated that she would need to spend about $80,000 to set up an online
presence, which would cost about $20,000 a year to maintain; $30,000 a year to increase
subscriptions to 30,000; and about $25,000 a year to promote the magazine to advertisers.
She also decided that she would hire a design firm for a one-time fee to set up the
website. She would use freelance professional writers, editors and designers to produce
each issue, both in print and online.

To finance these improvements, Singh approached a wealthy local philatelist. He

indicated that he might be willing to invest in the project but that he would need to see
pro forma financial statements before he made his decision. He particularly asked to see
revenues and expenses projected on a monthly basis.

Page 1 of 6
Peter MacDonald EAC649 Winter 2019

You work for BizAccounting LLP, a firm of accountants who do work for many small
businesses. When Singh realized that she needed to work out some proper accounting
policies for her new venture, she approached you and asked you to write a report
recommending how she should account for the magazine’s revenues and expenses. (She
didn’t ask you to project revenues and expenses – only to discuss the accounting policies
she should use to prepare a proper set of financial statements.) Singh wants monthly
statements that will show her how the business is doing and that will give the potential
investor a positive impression.

Singh gave you the following information on the magazine’s operations:

(1) Subscriptions are sold throughout the year. Subscribers pay $25 for six issues of
the magazine, which is published every second month. Subscribers can cancel
their subscription after one issue and receive a full refund. Singh plans to keep the
subscription price at its current level; subscribers would receive a print copy and
access to the online magazine.
(2) Advertising is sold on multi-issue contracts or for each issue separately.
Advertisers buying an ad in one issue pay in advance by cash, cheque or credit
card. Advertisers contracting in advance to advertise in more than one issue pay
half of the total in advance and half after all the ads have appeared.
(3) Writers, editors and designers are paid for their work when the work is done,
often a month ahead of the publication of the issue on which they are working.
(4) The magazine is mailed on the day on which it is printed; the issue dates are the
first of the month (February, April, June, August, October, December); Singh
plans to release each issue on the website on the day that the print copies are
mailed. The magazine has 30 days to pay postage expenses after the magazine is
mailed.
(5) In the magazine industry, promotion costs cannot usually be linked directly to the
revenue they generate.

In our classes on March 14 and 21, we will:

 Work through the accounting issues.
 Draft a management report to Carol Singh.
 Draft a one-page report to Bob Newhart, a senior partner at BizAccounting LLP

Page 2 of 6
Peter MacDonald EAC649 Winter 2019

Table 1
Stamps in Canada
Cash Flows, 2017

Revenue:
Subscriptions (1) $250,000
Advertising (2) 160,000
TOTAL 410,000

Expenses:
Writing, editing and design (3) 90,000
Printing (4) 120,000
Postage and mailing (5) 90,000
Subscription promotion 30,000
Miscellaneous 35,000
TOTAL 365,000

Cash surplus $45,000

Notes:
(1) 10,000 annual subscriptions @ $25. Subscription sales occurred evenly
throughout the year.
(2) Advertising revenues were approximately $25,000 per issue.
(3) Though Geoffrion did most of the writing, editing and photography himself, he
did hire freelance writers and designers for some of the work. The cost of this
work averaged $15,000 per issue.
(4) Printing costs were $2.00 a copy.
(5) Costs for postage and mailing services were $1.50 a copy.

Page 3 of 6
Peter MacDonald EAC649 Winter 2019

BizAccounting LLP
1 First Street
Toronto, ON M3M 3M3

16 March 2019

Ms. Carol Singh

Stamps in Canada
3 Bluenose Way
Toronto, ON M4M 4M4

Dear Ms. Singh

Thank you for asking BizAccounting to provide recommendations on accounting policies

for Stamps in Canada.

We understand that you want your monthly income statements to show you how the
business is doing and to provide your potential investor with a positive impression. To
accomplish this, your statements should follow generally accepted accounting principles
(GAAP), which have been designed to provide managers and investors with reliable
information on the performance of businesses. The recommendations we have made
below are based on GAAP.

1. Timing of statements

Your investor has asked for monthly revenue and expense figures. However, since your
magazine is published bimonthly, you should prepare your statements bimonthly to
match the economic reality of your business. In this way, each statement will be
connected directly to one issue of your magazine. Monthly statement will show no
revenue in months when the magazine is not published, and so would be meaningless
(see recommendation 2, below).

2. Subscription revenue

Subscribers buy annual subscriptions entitling them to receive six issues of the magazine.
GAAP requires that you include the revenue in the income statement when you have
provided the service – in this case, when you have mailed each issue the magazine. You
should therefore include one-sixth of the revenue from each active subscription ($1.67) in
the months in which the magazine is mailed (February, April, etc .). Since you allow
subscribers to cancel their subscriptions and receive a full refund after they receive one
issue, you should use historical cancellation rates to adjust the amount of revenue you
include. For example, if 10% of subscribers typically cancel, you should include $1.50
(90% x $1.67).

Page 4 of 6
Peter MacDonald EAC649 Winter 2019

3. Advertising revenue

You should include advertising revenue in the months in which the issues are published.
For single-issue advertisers, this will be the full amount that they have paid. For multi-
issue contracts, this will be the amount for the advertisement appearing in the specific
issue. For example, if an advertiser pays $900 for a two-issue contract, you would include
$450 for each issue. If a contract advertiser does not pay the 50% due at the end of the
contract, you will need to reduce the revenue by the amount you failed to collect; this
reduction in income should appear in the period in which you decide to write off the
account.

4. Expenses related to specific issues

To accurately reflect the performance of the business, GAAP requires that you match
expenses to the revenues generated by these expenses. In this case, you should include all
expenses related to specific issues in the statements associated with those issues, even
though you may have paid these expenses earlier (e.g., writing, editing) or later (e.g.,
postage). For example, all writing, editing, design, printing, and postage expenses for the
January/February issue should be included in the January//February statement.

5. Promotional expenses

You have told us that there is no way to link promotional expenses with specific revenues
generated by the promotional activity. In cases such as this, GAAP required that you
include the expenses in the period in which they are incurred – in other words, when you
pay for them.

6. Website design and maintenance

These expenses fall into two categories:

 The initial design and set-up costs. These will generate revenue over several years,
so you should include the total as an asset in your balance sheet. You would
amortize this over five years, or 30 bimonthly periods; thus, in each bimonthly
statement, you would include one-thirtieth of the total as an expense.
 The ongoing maintenance costs. You should include these costs as expenses when
they are incurred.

Following these recommendations will ensure that your bimonthly statements give both
you and your investor a timely and accurate picture of the business’s operations.

If you have any questions, please call me at 416-555-5555.

Regards

Meyer Lansky, CPA

Staff Accountant

Page 5 of 6
Peter MacDonald EAC649 Winter 2019

MEMORANDUM

To: Bob Newhart

From: Meyer Lansky
Date: 17 July 2019
Subject: Accounting policies for Stamps in Canada

Carol Singh, the owner of the bimonthly magazine Stamps in Canada, asked us to
recommend policies for the preparation of monthly income statements both for her own
use and to provide to a potential investor. The table below summarizes the
recommendations I provided to her in a report written on 16 March.

Item Details Recommendation

Statement frequency Magazine published
bimonthly
Subscription revenue Annual subscriptions, with
the right to cancel after one
issue and receive a full
refund
Advertising purchased in Paid in advance
single issue
Multi-issue advertising 50% paid in advance, 50%
contracts paid at end of contract
Issue costs Writing, editing, design
usually paid for ahead of
issue release; printing;
postage costs due 30 days
after mailing
Promotional costs Cannot be matched with
specific revenue generated
Website design and set-up
Website maintenance
Bimonthly statements
Recognize one-sixth for
each issue when issue is
mailed, discounted by
historical cancellation rate
Recognize when issue is
mailed
Recognize proportion of
total assigned to each issue;
recognize bad debt when
written off
Match to issue revenues
Period cost
Capitalize; amortize over
60 months
Period cost

If you have any questions, please call me on extension 999.

Page 6 of 6