QuickServe, a chain of convenience stores, was experiencing some serious cash flow difficultiesbecause of rapid growth. The company did not generate sufficient cash from operating activities tofinance its new stores, and creditors were not willing to lend money because the company had notproduced any income for the previous three years. The new controller for QuickServe proposeda reduction in the estimated life of store equipment to increase depreciation expense; thus, “wecan improve cash flows from operating activities because depreciation expense is added back onthe statement of cash flows.” Other executives were not sure that this was a good idea because theincrease in depreciation would make it more difficult to report positive earnings: “Without income,the bank will never lend us money.”Required:What action would you recommend for QuickServe? Why?
QuickServe, a chain of convenience stores, was experiencing some serious cash flow difficulties
because of rapid growth. The company did not generate sufficient cash from operating activities to
finance its new stores, and creditors were not willing to lend money because the company had not
produced any income for the previous three years. The new controller for QuickServe proposed
a reduction in the estimated life of store equipment to increase
can improve
the statement of cash flows.” Other executives were not sure that this was a good idea because the
increase in depreciation would make it more difficult to report positive earnings: “Without income,
the bank will never lend us money.”
Required:
What action would you recommend for QuickServe? Why?
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