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

Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy in light of a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital will improve free cash flow. Historically, RR has done little to examine working capital, mainly because of poor communication among business functions. In the past, the production manager resisted Johnson’s efforts to question his holdings of raw materials, the marketing manager resisted questions about finished goods, the sales staff resisted questions about credit policy (which affects accounts receivable), and the treasurer did not want to talk about the cash and securities balances. However, with the recent credit scare, this resistance has become unacceptable and Johnson has undertaken a company-wide examination of cash, marketable securities, inventory, and accounts receivable levels. Johnson also knows that decisions about working capital cannot be made in a vacuum. For example, if inventories could be lowered without adversely affecting operations, then less capital would be required, and free cash flow would increase. However, lower raw materials inventories might lead to production slowdowns and higher costs, and lower finished goods inventories might lead to stockouts and loss of sales. So, before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables. Johnson has begun her investigation by collecting the ratios shown here. (The partial cash budget shown after the ratios is used later in this mini case.) Johnson plans to use the preceding ratios as the starting point for discussions with RR’s operating team. Based on the data, does RR seem to be following a relaxed, moderate, or restricted current asset usage policy?

Penco Ltd’s board of directors are looking into expanding the company’s business operations. Before investing in a new product, the board conducted one focus group, and based on this one bit of feedback, invested $5m of company funds to develop the product. Within two years, the company had lost $8m due to poor sales. Shareholders are furious and wish to hold directors personally liable for this loss. Analyse the likely outcome for directors if shareholders were to accuse the board of breaching CA s 180.

You joined Henderson Technology Limited as accounting manager recently.  In a management meeting, William Buckle, the managing director, expressed his concern on an amount due from Hunters Limited, which is long overdue and is unlikely to be recoverable. In a review of the aged debtors report, you found that over 40% of the debtors have overdue accounts.  You also noted that there is no control system in place.  You believe a better credit control system would help.        You are required to prepare notes for your meeting with William, to outline the objective of having a control system in place, and the key points of a credit control system that would help to reduce overdue accounts.