After investigating the different forms of business organization, Candy Johnson

Question

After investigating the different forms of business organization, Candy Johnson decides to operate her business as a corporation, All Things Respiratory and she begins the process of getting her business running.

While at a trade show, Candy is introduced to Gerry Rich, operations manager of “Bayou Clinic,” a national medical facility. After much discussion, Gerry asks Candy to consider being Bayou Clinic’s major supplier of respiratory equipment. He provides Candy with the most recent copy of the financial statements of Bayou Clinic. He expects that Candy will need to supply Bayou Clinic’s warehouse with approximately $500,000 worth of respiratory supplies and services a week. Candy is to send Bayou Clinic a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Bayou Clinic’s Michigan office.

Candy is thrilled with the offer. However, she has recently read in the newspaper that Bayou Clinic has a reputation for paying late, not at all, or claiming they never received the inventory or services. Others are not jumping at the opportunity to be on the payroll for Bayou Clinic, especially a new start-up.

Instructions

Candy has several questions. Answer the following questions for Candy.

(a) What type of information does each financial statement provide?

(b) What financial statements would Candy need in order to evaluate whether Bayou Clinic will have enough cash to meet its current liabilities? Explain what to look for.

(c) What financial statements would Candy need in order to evaluate whether Bayou Clinic will be able to survive over a long period of time? Explain what to look for.

(d) What financial statement would Candy need in order to evaluate Bayou Clinic’s profitability? Explain what to look for.

(e) Where can Candy find out whether Bayou Clinic has outstanding debt? How can Candy determine whether Bayou Clinic would be able to meet its interest and debt payments on any debts it has?

(f)   How could Candy determine whether Bayou Clinic pays a dividend?

(g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Candy should be aware of?

Explanation / Answer

Ans 1 - The balance sheet provides information of the current financial position of an organization. The Profit and Loss A/c or the Income Statement provides the details of the revenues and expenses during the year and profit or loss at the end of the year. The cashflow statement provides the details of the cash inflows and outflows during the year.

Ans 2 - Candy need to know the Current Ratio and the Quick Ratio of Bayou which she will get from the balance sheet.

Ans 3 - Candy will need to evaluate the capital structure of the organization for speculating the long term survival. This can be found on the balance sheet. Capital structure include the amount of debt taken and the stockholder's equity.

Ans 4 - Profitability of Bayou can be viewed and evaluated by comparing income statements of two to three years or periods.

Ans 5 - For debt information the balance sheet can be viewed. And for the interest payments the income statement can be viewed.

Ans 6 - Candy can view the income statement to check for dividends.

Ans 7 - Candy should check the payment periods of Bayou which are given as ratios in the notes to statements. Candy can then compare the payment period of Bayou with other organizations in the same business.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.