ACC 504 Lecture Notes - Credit Risk, Signing Bonus, Cash Flow
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How to Do a Case
To: Haddock’s Union party
From: Financial advisor
Re: effect on cash flow from following Issues: Revenue recognition, accounting
for securities, treatment of research vs. development costs, investments, Bank
covenants, tax asset, disclosure issues, expensing-.
My role is to be a financial consultant to the union leaders of Haddock. They are
interested in knowing the true cash flow of company in the short and long term to assess
whether or not the company is capable of meeting their demands. The users of the
analysis are not sophisticated users and must be presented with simple explanations and
relevant information to avoid confusion and to ensure proper use of recommendation.
The company is a privately owned company operating since 1966. The current union
agreement is to expire on April 30, 2002 ( in 2 months) and he union is demanding a
three year contract with a 10% increase is salary and a $5000 bonus for each employee
(Haddock has a 100 employees).
Discuss all related industry facts that will contribute to the case.
Users and Objectives (state objective and why):
Owners: will want to maintain internal control and minimize taxes while maximizing
profits. Also, along with profit maximization cash flow prediction is important to make
the business more attractive to creditors for lending money. Lastly it is important for
owners to perform management evaluation.
Management: Management will be interested in tax minimization and performance
evaluation. Profit and bonus maximization are the main concerns.
Tax Authority: the CRA wants to ensure taxes are being paid fairly.
Bank: The bank has placed a covenant: the business must maintain a current ratio of
1.2:1. Cash and collateral are also very important to the bank. The bank will also be using
the financial statements to access performance evaluation of the company. Largely,
interest lies in valuating assets/ collateral as well as liquidity of the company.
Union: The union leaders want to know the fair cash flow to see if the company is
capable of meeting their demands. They will want to see a positive cash flow as well as.
Cash flow analysis is the main financial statement they are interested in.
Ranking of Users and Objectives