Question:
Beauty Ltd sells cosmetics and markets itself on the basis that its products have not been tested on animals. it has ethical policies towards its staff and suppliers, and that it takes corporate responsibility very seriously. The company is associated with an organisation that represents a collective of suppliers and staff, EnviroProducts, which holds one ordinary B share in Beauty (under Beauty's constitution, this gives EnviroProducts significant powers, including a controlling vote on all matters of strategy).
In the financial year to 30 June 2016, Beauty floated on the Australian Securities Exchange. As part of this float, there was also a restructuring of the shares. In the restructuring 50,000 ordinary A shares were bought back by the company and exchanged for 25,000 ordinary shares. A further 1,200,000 ordinary shares were sold on the stock exchange for $5. The new issue was fully subscribed.
Beauty's results show an increase on the previous year. Revenue is $26 million (2015: $21 million) and profit before tax is $1.7 million (2015: $819,000). The cash raised by the floatation enabled the company to pay off some long term debts and improve its short term liquidity position.
Beauty has two main product divisions: makeup and gifts. Makeup includes everything that would be expected in a cosmetics line. Gifts include not only handmade soaps and shampoos but also a range of handmade products from developing from developing countries and products made from recycled materials.
The company markets its products in four ways: mail-order catalogue, company website, retail stores and personal selling. In recent years the mail order and personal selling have been falling significantly, but at the same time sales via the company's website have increased substantially.
As part of its commitment to its suppliers, many of whom depend exclusively on Beauty, the company sometimes pays high prices for its purchases, even when other cheaper but less eco-friendly alternatives exist. Also as part of its commitment, Beauty sometimes pay suppliers in advance of receiving goods or in some cases even before placing an order. Given that the business is expanding, there has been an increase in the range of products sold and therefore an increase in the number of suppliers from all over the world, resulting in a large increase in the level of advance payments. As 30 June 2016 the amount paid in advance was $1.9 million (2015: $614,000).
Required
Consider the situation above and highlight the business risks. Then consider the extent to which those risks could have an impact on the financial statements.
[Note: Business risks are threats that the organisation faces in attempting to achieve its goals.]