John Young is a new assistant controller at Richmond Electronics, a large regional consumer electronics chain....

John Young is a new assistant controller at Richmond Electronics, a large regional consumer electronics chain. Before John’s recruitment, he was aware of Richmond’s long trend of moderate profitability. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The issue he is facing as he reviews the reports is the decline and erratic trend in cash flows from operations.

John sketched the following comparison ($ in millions):	Income from operations	Net income	Cash flow from operations
2014	$ 140.0	38.5	1.6
2013	$ 132.0	35.0	19.0
2012	$ 127.5	34.5	14.0
2011	$ 127.0	29.5	15.5

His sketch shows increasing profits but ominous trend in cash flow, which is consistently lower than net income. Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:

Richmond loosened its credit policy. In other words, Richmond relaxed its credit terms and lengthened payment periods.

Accounts receivable balances increased dramatically.

Several of the company’s compensation arrangements, including that of the controller and the company president, were based on reported net income.

What is so ominous about the combination of events John sees? If you were John, what course of action will you take?

Expert Solution

John has observed that even though the net income is showing a slow but steady increase over the years , the cash flows are declining. He has further observed that the credit terms have been relaxed, the accounts receivable balances are increasing and compensation of several employees is based on the net income. It is ominous that the credit terms have been relaxed, so that the cash flow to the company is delayed resulting in a liquidity crunch. Further, accounts receivable balances have increased showing that there is no effort on the part of the employees to improve liquidity position. In addition, since the compensation contracts are based on the net income, employees are not focused in recovering the receivables to the company.

If I were John, I would take the following measures:

-I would tighten the credit policy to include less flexible credit terms.

-A program to recover the accounts receivables as fast as possible would be undertaken.

-The compensation contracts would be redesigned to ensure that a part of compensation is based on operating cash flow.

ekkarill92 answered 1 year ago

Suppose that you are an entrepreneur who has started a new chain of consumer electronics stores....

Suppose that you are an entrepreneur who has started a new chain of consumer electronics stores. Your competitive edge is to offer excellent customer service. What would you do to empower your employees to help achieve this goal? Write a 1 to 2 page paper on this subject and cite your resources

Topic: Corporate Social Responsibility Involved Parties: Bob, President John, Chemical Engineer Henry, Controller Kirk, Assistant Controller...

Topic: Corporate Social Responsibility Involved Parties: Bob, President John, Chemical Engineer Henry, Controller Kirk, Assistant Controller Kirk is a bright individual who is being groomed for the Controller’s position in a medium-sized manufacturing firm. After his first year as Assistant Controller, the officers of the firm were starting to include him in major company functions. For instance, today he was attending the monthly financial statement summary given at a prestigious consulting firm. During the meeting, Kirk was intrigued at how...

The controller of a large retail chain is concerned about a possible slowdown in payments by...

The controller of a large retail chain is concerned about a possible slowdown in payments by customers. The controller randomly selects a sample of 10 accounts, with the following ages (in days): 40, 45, 50, 65, 70, 75, 78, 80, 82, 85 The sample standard deviation (s) is 15.53. The controller wants to determine if the population mean number of days that the company must wait to get paid exceeds 65, which is the historical average. If it does, the...

You have recently been hired as the assistant controller for Stub Industries, a large publicly held...

You have recently been hired as the assistant controller for Stub Industries, a large publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the VP of Finance. The controller has assigned you the task of preparing the year-end adjusting entries. In the receivable area, you have prepared an aging of accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate balance...

You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held...

You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the vice president of finance. The controller has assigned you the task of preparing the year-end adjusting entries. In the receivables area, you have prepared an aging of accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate...

You have been recently hired as an assistant controller for XYZ Industries, a large, publically held...

You have been recently hired as an assistant controller for XYZ Industries, a large, publically held manufacturing company. Your immediate supervisor is the controller who also reports directly to the VP of Finance. The controller has assigned you the task of preparing the year-end adjusting entries. In the receivables area, you have prepared an aging accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate estimated balance for...

What is the effect of new technology on consumer electronics market?

During the preparation of the bank reconciliation for New Concepts Co., Peter Fikes, the assistant controller,...

During the preparation of the bank reconciliation for New Concepts Co., Peter Fikes, the assistant controller, discovered that City National Bank incorrectly recorded a $710 check written by New Concepts Co. as $170. Peter has decided not to notify the bank but wait for the bank to detect the error. Peter plans to record the $540 error as Other Income if the bank fails to detect the error within the next three months. -Discuss whether Peter is behaving in a...

Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele.

EXERCISE 1-4 Ethics and the Manager Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these...

After spending ten years as an assistant manager for a large restaurant chain, Ray Clark has...

After spending ten years as an assistant manager for a large restaurant chain, Ray Clark has decided to become his own boss. The owner of a local submarine sandwich store wants to sell the store to Ray for $65,000 to be paid in installments of $13,000 in each of the next five years. According to the current owner, the store brings in revenue of about $110,000 per year and incurs operating costs of about 63% of sales. Thus, once the...

Question