Brick Brewing Co. Limited is a Canadian-owned brewery with its head office in Kitchener, Ontario. The company brews, sells, and markets its products under the Waterloo, Laker, Red Baron, Red Cap, and Formosa brand names. The company also produces, sells, markets, and distributes Seagram’s Coolers across Canada. The information in Exhibits 7.24A to 7.24C was taken from the company’s 2017 annual financial statements.

EXHIBIT 7.24A Brick Brewing Co. Limited’s Statements of Financial Position

BRICK BREWING CO. LIMITED
Statements of Financial Position
(As at January 31, 2017 and January 31, 2016)

EXHIBIT 7.24B Excerpt from Notes to Brick Brewing Co. Limited’s 2017 Financial Statements

BRICK BREWING CO. LIMITED
Excerpt from Notes to Financial Statements
5.10. Inventories

Inventories are recorded at the lower of cost and net realizable value. Cost includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell the product. The cost of raw materials and supplies are determined on a first-in, first-out basis. The cost of finished goods and work-in-process are determined on an average cost basis and include raw materials, direct labour, and an allocation of fixed and variable overhead based on normal capacity. Inventories are written down to net realizable value if that net realizable value is less than the carrying amount of the inventory item at the reporting date. If the net realizable value subsequently increases, a reversal of the loss initially recognized is applied to cost of sales.

EXHIBIT 7.24C Excerpt from Notes to Brick Brewing Co. Limited’s 2017 Financial Statements

As at January 31, 2017, a provision of $121,170 (January 31, 2016 – $56,670) has been netted against inventory to account for obsolete materials. The cost of inventories recognized as cost of sales during the year ended January 31, 2017 are $25,126,291 (January 31, 2016 – $22,766,711). Included in this amount are charges related to impairment caused by obsolescence. During the year ended January 31, 2017, these charges amounted to $97,780 (January 31, 2016 – $22,446).

Required

a. Note 15, shown in Exhibit 7.24C, breaks down Brick’s inventory into two classifications. Which classifications of inventory do you believe should be used in determining the inventory turnover ratio? Why?

b. Describe Brick Brewing’s inventory valuation policies in your own words. Specifically, explain what Brick Brewing includes in inventory cost, what cost formula(s) the company uses, and how it values its inventory on the statement of financial position.

c. Calculate the inventory turnover ratio and days to sell inventory ratio for 2017 and 2016. Use the inventory values in 2017 and 2016 rather than the average inventory to calculate the ratios. Explain the amounts you selected from the financial statements to use in your calculation.

d. Calculate the current and quick ratios and comment on them.

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January 31, 2016 January 31, 2017 Notes ASSETS Non-current assets Property, plant and equipment 12 $21,709,425 $21,986,070 Intangible assets 13 15,499,186 15,375,392 Construction deposits 2,462,328 Deferred income tax assets 11 1,262,769 39,670,939 38,624,231 Current assets Cash 2,831,959 393,645 Accounts receivable 7,035,714 14 6,176,421 Inventories 3,291,529 15 5,619,329 Prepaid expenses 593,180 354,650 10,216,245 16,080,182 TOTAL ASSETS $55,751,121 $48,840,476 LIABILITIES AND EQUITY Equity Share capital $39,651,096 $39,526,573 16 Share-based payments reserves 943,565 17 932,201 Deficit (2,758,560) (4,933,195) TOTAL EQUITY 37,836,101 35,525,579 Non-current liabilities Provisions 19 411,599 388,548 Obligation under finance lease 3,781,855 20 4,523,152 Long-term debt Deferred income tax liabilities 2,498,580 1,548,584 21 82,389 6,774,423 11 6,460,284 Current liabilities Accounts payable and accrued liabilities Current portion of obligation under finance lease Current portion of long-term debt 4,908,722 23 9,655,405 713,699 20 741,297 21 743,895 11,140,597 1,232,192 6,854,613 TOTAL LIABILITIES 17,915,020 13,314,897 COMMITMENTS 25,26 TOTAL LIABILITIES AND EQUITY $55,751,121 $48,840,476 BRICK BREWING cO. LIMITED Excerpt from Notes to Financial Statements 15. Inventories The inventories balance consists of the following: January 31, 2017 January 31, 2016 Raw materials, supplies and other Work in progress and finished goods $1,991,068 3,628,261 $5,619,329 $1,568,442 1,723,087 $3,291,529