Katie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in Year 4, and cash flows from operations will probably be down 25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for Years 1 through 4 and will want a projected number for Year 5. Murphy knows that a steady progression upward in operating cash flows for Years 1 through 4 will help her case. She decides to use her discretion as owner and considers several business actions that will turn her operating cash flow in Year 4 from a decrease to an increase. Required 1. Identify two business actions Murphy might take to improve cash flows from operations. 2. Comment on the ethics and possible consequences of Murphy’s decision to pursue these actions.

Katie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in Year 4, and cash flows from operations will probably be down 25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for Years 1 through 4 and will want a projected number for Year 5. Murphy knows that a steady progression upward in operating cash flows for Years 1 through 4 will help her case. She decides to use her discretion as owner and considers several business actions that will turn her operating cash flow in Year 4 from a decrease to an increase. Required 1. Identify two business actions Murphy might take to improve cash flows from operations. 2. Comment on the ethics and possible consequences of Murphy’s decision to pursue these actions.

Name: Katie Murphy is preparing for a meeting with her banker. Her business
Uploaded: 2024-03-20T06:32:37.000Z
Channel: Bartleby
Description: Katie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive.

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter5: Managing Checking And Savings Accounts

Section: Chapter Questions

Problem 7FPC

See similar textbooks

Similar questions

Sal Shirey is an owner of a small business. His company has recently borrowed a large amount of funds to finance the construction of a large building addition, as well as, the purchase of equipment and machinery. Shirey's banker requires him to submit quarterly financial statements so that he can monitor the financial health of his business. The bank has warned that if profit margins decline, the interest rate on the loan may need to be increased in order to reflect additional risk. Shirey knows that profit may decline this year. As he is preparing the year-end adjusting entries, Sal decides, for depreciation purposes, to treat all long-term asset purchases as though they occurr on the first day of the month following the month of purchase. 1. Is there an ethical issue with the implementation of this rule? If so, what is it?2. When should depreciation first be recorded?3. What impact will Shirey's approach to recording depreciation have on the financial statements?
Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) Required 1. Identify decisions that managers like Choi must make in applying depreciation methods. 2. Is Choi’s rule an ethical…
Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following quarter. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) Discuss the following: Identify decisions that managers like Choi must make in applying depreciation methods. Is Choi’s rule an…
Janet Molly is one most trusted employees. She never complains about herwork and rarely misses work due to illness or vacation. The company has been successful overthe years, but is now having cash flow problems. Because of the recent downturn in thecompany, you take a closer look at all the company’s financial records. When you ask Janetabout the recent cash flow problems, she responds, ‘I don’t know what is going on. I only do thereporting. Ask those who manage the company.” This behaviour differs from Janet’s normalpleasant deportment. As you continue your investigation, you discover that the reported financial results do not match what the company is doing, but you cant determine why. You decided toinvestigate Janet further. 1. What are some behaviour and lifestyle changes that you should look for? 2. What resources can you use to conduct your research?
Otis is the CEO of Bay Corp. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants. Otis is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Otis undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light? Inventory turnover Quick ratio Collection ratio Profit margin
You are a financial adviser with a client in the wholesale produce business that just completed its first year of operations. Due to weather conditions, the cost of acquiring produce to resell has escalated during the latter part of this period. Your client, Javonte Gish, mentions that because her business sells perishable goods, she has striven to maintain a FIFO flow of goods. Although sales are good, the increasing cost of inventory has put the business in a tight cash position. Gish has expressed concern regarding the ability of the business to meet income tax obligations. Required Prepare a memorandum that identifies, explains, and justifies the inventory method you recommend that Ms. Gish adopt.
You are a loan officer of Third National Bank and already way behind your target revenue for the year. One day the owner of a midsized company came to your office and is requesting for an immediate $100,000 loan for which she has appropriate collateral. You also know that the bank is going to reduce lending rates in the next couple of months. What actions would you take?Explain thoroughly
John Marshall is employed as a bank loan officer for First State Bank. He is comparing two companies that have applied for loans, and he wants your help in evaluating those companies. The two companies—Morris, Inc., and Walker Company—are approximately the same size and had approximately the same cash balance at the beginning of 2009. Because the total cash flows for the three-year period are virtually the same, John is inclined to evaluate the two companies as equal in terms of their desirability as loan candidates. Abbreviated information (in thousands of dollars) from Morris, Inc., and Walker Company is as follows: Morris, Inc. Walker Company 2009 2010 2011 2009 2010 2011 Cash flows from: Operating activities $10 $13 $15…
You are an assistant in the accounting department of Hasher Electronics, a small electronicsretailer. Hasher has a loan that requires the company to maintain a minimum cash balance of$125,000, as reported on its year-end balance sheet. Although Hasher has struggled in recent years,as of yesterday it looked as though Hasher would be able to meet this requirement. The cash balance in Hasher’s general ledger was $130,000 and the company’s credit manager was expecting toreceive a $30,000 electronic funds transfer that day on account from your biggest customer. Yourdepartment supervisor had been worried about meeting the loan requirement, so she had delayedmaking payments to Hasher’s suppliers for several days. But in anticipation of receiving the EFT,she decided yesterday to issue checks to suppliers totaling $15,000.It is now the last day of the fiscal year and your supervisor approaches you with a problem.Your big customer had backed out at the last minute, indicating it had “some…
Best Exports has noticed their current year net income is only $60,000. In order to get a loan from their bank to assist the business they will need to provide a statement of cash flows. In reviewing the statement of cash flows, you notice a large increase ($80,000) in accounts receivable due to two of your largest customers being behind in payments. Since the bank looks at the operating activities, this increase will create concern. You make a suggestion to reclassify the accounts receivables to long-term, thus removing them from current assets will increase the net cash from operations. Under what circumstances would this reclassification be considered ethical or unethical? Support your selection by finding an article which explains your choice.
Madeline is the sole proprietor of Maddie's Fine Art and wants to know whether she will have enough funds in her bank account to pay her bills over the next three months. She has $1,000 in her bank account after recently selling a painting, owes $500 to a vendor for paint and canvas, and expects an additional $500 in invoices in the next three months for other supplies. As her accountant, the best feedback you can give Madeline is: Assuming no additional sales over the next three months, Maddie's Fine Art has a current ratio of 1.0 and therefore has the necessary liquidity to pay its vendors. Madeline will need to sell at least one more painting for $500 to cover the invoices due within the next three months as Maddie's Fine art has a current ratio of 0.5. Madeline should consult with a bankruptcy attorney because Maddie's Fine Art has a current ratio of 0.75 and may not be able to pay any or all of its invoices within the next three months. O In addition to paying her current…
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high. Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $5,000 per month, and the rent is $1,700 per month. In addition, she must make a tax payment of $11,000 in December. The current cash on hand (on December 1) is $500, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register, which is…