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home / study / questions and answers / business / accounting / after investigating the different forms of business ... 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:a.

The basic financial statements of any company include the 1) balance sheet ,2) income statement, 3) cash flow statement, and 4) statement of changes in owners' equity or stockholders' equity. The balance sheet provides detailed information of an entity as of a particular date.A balance sheet provides detailed information about a company's assets, liabilities.

Ans:b

Current Ratio and the Quick Ratio of financial statements are needed by candy in order to evaluate whether Bayou Clinic will have enough cash to meet its current liabilities are not.

Ans:c

Capital structure include the amount of debt taken and the stockholder's equity so, capital structure of a financial statement is needed by candy in order to evaluate whether Bayou Clinic will be able to survive over a long period of time.

Ans:d

In order to evaluate Bayou Clinic’s profitability we need to use the income statement of financial statements .By comparing income statements of two to three years only we can determine the profitabulity of a firm.

Ans:e

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

Ans:f

Based on the income statement only Candy determine whether Bayou Clinic pays a dividend or not.

Ans"g

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.

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