Working Capital Management

Applications and Case Studies; the questions were adapted from the same section of the textbook. Respond in complete sentences as appropriate.

1. Given Eric’s philosophy of just-in-time in meeting customer requirements, is he too accommodating in this inventory policies, and could this potentially lead to a cash-flow problem? Do you have any specific suggestions or recommendations, such as a loan covenant limiting inventory to a certain percentage of sales? Type your three- to four-sentence response below.

2. What is your assessment for receivables in terms of credit quality? In other words, how did Office Smart increase its market share—possibly by lowering credit standards? Would it be prudent to ask for detailed data on receivables for at least the top 10 customers? Type your three- to four-sentence response below.

3. What documentation will you require? Customary documentation includes monthly income statements, statements of cash flows, and balance sheets. In addition, you may wish to see data on forecast economic activity in the Connecticut–Massachusetts–Rhode Island area, student enrollment projections at area universities, tax returns for each year, and other information that supports the loan. Type your three- to four-sentence response below.

4. Which firm would be acceptable as an outside auditor? Is your bank going to be satisfied with a local accounting firm that may have Office Smart as an important client? Recall that Arthur Andersen was differential to Enron on its audit due to substantial consulting fees and the fear of losing that company as a client. Type your three- to four-sentence response below.

 

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