FIN 101 Lecture 16: Make No Oral Agreements For Any Significant Purchases Or Sales

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16 Aug 2020

School

Ball State University

Department

Finance

Course

FIN 101

Professor

Olga S Mc Atee

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Document Summary

Make no oral agreements for any significant purchases or sales. These are normally valid and legally binding as written agreements, but when they are spoken, they are a lot harder to enforce. This means for any significant product or service that has value and specific terms, make sure you have a written contract. If you made an oral agreement for some reason, follow-up with an email talking about the terms of the agreement. This would most likely be okay to prove terms of your offer in court. Unless you have something in writing, you might end up with the shorter end of the stick. You feel the impact more of what you"re spending when you use cash instead of a card or check. It"s a lot easier to overspend on something when you"re signing one piece of paper instead of handing over your cash you earned yourself. Approach your job following the three p"s: passion, politeness, and persistence.

Related Questions

You are doing a walk-through of the credit and collections function to get an idea of what internal controls exist and where there might be weaknesses. Then, after you finish, you or another member of the audit team will be testing the system to determine whether the internal controls actually exist and actually work as you have been told. In the meantime, keep your eyes, ears, and mind open for any weaknesses in internal control.

The department head of the credit and collections department is telling you how things work in the department. "Jenny, here, receives the mail and distributes it to the various collectors. They each open their own mail. There is a lot of correspondence going back and forth to and from customers, so it is easier if each collector just handles her own mail." It is easy for Jenny to distribute the mail because most of the letters are addressed to a specific individual.

You watch as one of the individuals opens the mail and handles the items inside. Many of the items are disputes-the customer says the items billed were not ordered, or, if ordered, were not received. Every such letter results in the disputed bill being written off. As the department head explains, the vice president of sales told him, a few years ago, that too many customers were complaining that the credit department was too tough on them, so he had decided that rather than have any more complaints, every such bill would be written off. The procedure is that the collector initiates a form, called a write-off form, to write off a particular amount from a customer's balance. In the explanation block, the collector simply writes "customer dispute." This form is signed by the collector, sent to accounting, and accounting processes the forms each Wednesday. There are so many letters with so many disputes that the department has a monthly competition for the most unusual letters, which are tacked up on a bulletin board. All the rest of the dispute letters are thrown away as soon as the collector has filled out the write-off form.

Collectors also receive checks in the mail. These are payments from customers whose accounts are wholly or partly overdue. As one of the collectors explains, they each receive a print-out once a month, so if the customer sends in a payment, there is no way for the collector to find out about it before the next month's print-out arrives unless the collector receives the payment. Most of the collectors process dozens of payments each month. They make whatever notations they need on the monthly print-out, prepare a deposit ticket, send the department's runner to the bank each Friday (collections are accumulated until Friday, with the customers' payments being held in an otherwise empty desk drawer until then), and send the receipted deposit ticket on to the department which records collections of cash. The credit and collections department also sends a listing of which customers to credit for having paid all or part of their balances.

Near the end of each fiscal quarter, the corporate controller gets a preliminary set of financial statements, and then he tells the department head by telephone how much the department is allowed to write off in bad debts. Thus, the company writes off bad debts only in the third month of each fiscal quarter. "Why does he tell you by telephone?" you ask of the credit and collections manager. "He doesn't want any written record of it," is the reply.

You are interested in how the department decides which customer balances to write off as uncollectible and which to leave on the books. "We write off the oldest ones, up to the amount of what we have been told we can write off," says the credit and collections manager. "That way, our percentage of bad debts always comes out pretty much in line with what we have done before, and the auditors have always been satisfied with it. They had read some academic articles from some people who recommended using time-series analysis to see if the numbers were correct, so they test the accounts receivable account and satisfy themselves that the sales and receivables are real, but they always test the write-offs and bad debts expense simply by using the time-series analysis recommended by the accountants with those fancy doctorates. Go ask the guy who ran the audit last year."

You inspect the process by which customer payments are received the regular way, which is done in a different department. The company has a special Post Office box set up. Twice a day, some one person from maintenance goes to the Post Office to pick up the mail, including the customer payments received at this special Post Office box. It is not always the same person from maintenance who goes to the Post Office; whoever is available when the department head looks around is typically the one who is sent.

When the person returns from the Post Office, he brings a bunch of mail to the cash receipts department, where the mail is opened and customers' checks are paperclipped to the envelopes they came in. One of the goals of the cash receipts department is to get the customer payments deposited promptly, so after all the checks are paper-clipped, someone from the department goes to the bank, fills out a whole bunch of deposit slips, deposits those checks, and comes back to the department with those receipted deposit slips. Then the department members try to figure out which customer paid which amounts. They are helped by the routing number on the checks, but those routing numbers represent banks, not customers, and multiple customers use the same banks. Consequently, they refer to a listing of routing numbers to identify the banks, then to a listing of banks to see which customers use those banks, and then to another copy of the same monthly print-out used in credit and collections to figure out which of the customers who use that bank must have paid that particular amount. If they cannot make a good guess, they call some of the customers to ask if they are the ones who paid the amount. Once they think they know who paid the amount, they generate a journal entry to debit cash and credit the customer's account; the credit to the customer's account is automatically also a credit to accounts receivable. Since they have a copy of the monthly printout of accounts receivable, when a customer's payment is not for the full amount of an invoice, they just go ahead and adjust that customer's account so the full amount of the invoice is taken off the customer's account. They say they are creating a lot of goodwill with customers that way.

a. What internal control weaknesses do you see in this system?

b. What are the potential effects of these weaknesses?

c. What do you recommend instead (that is, if you have such a recommendation)?

skycricket458

Develop a high-level funding schedule for a new venture business concept that can be used to discuss cash requirements for the first year of operations with prospective investors. The schedule should be prepared on a monthly basis and should include the following specific details:

(1.) Headcount plan - including all personnel needed to carry out the critical operations of the business for the upcoming year.

(2.) Forecast general & administrative expenses, including office rent and related costs, utilities, communication expenses, insurance, filing fees, etc.

(3.) Estimate the cost of how you plan to market the company/product.

(4.) Develop your revenue model, including key assumptions and variables such as unit sales, sales growth, number of customers by the end of the year, product pricing, etc., Make the model flexible enough to enable you to change key variables and run âwhat ifâ analyses.

(5.) If the cost of delivering your product of service is significant, forecast the cost of goods sold based upon estimate costs and the product assumptions used in item 4 above.

(6.) After preparing the initial financial plan, critically review the plan and assumptions (including having advisors and other management team members review the plan for reasonableness). Adjust the month-to-month results to ânormalizeâ the cash balance (and ensure it never runs below $0), adjusting discretionary expenses if necessary.

(It can be any business venture as in a resturant or a store)

Upon completion of the financial model, answer the following questions:

Question 1

How much cash do you need to raise to operate during the first 12 months of operations? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 2

Does the amount of cash needed in item 1 above fall within the âreasonableness rangeâ for an early stage company (i.e., up to $5 million)? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 3

What is your monthly cash burn rate - both gross and net burn (gross burn is the average of total expenses each month; net burn is gross burn offset by the average monthly cash generated from revenues). Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 4

How long will you be able to operate at the end of the 12 months forecast before you need to raise additional funding? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 5

Please attach a copy of the Financial Model that you created for this assignment.

EXAMPLE

How much cash do you need to raise to operate during the first 12 months of operations? Please include your numeric answer and an explanation of several sentences.

As I plan to operate a restaurant with a nice ambiance I would require premises, renovation and internal decor, furniture, electric setup, a couple of computers, staff, their uniforms, chefs, food supply, tables, chairs and couches, brochures and menu cards, marketing and advertising. Premises and land= $196.3K Renovation and internal decor= $49K Furniture, tables and chair= $20K Staff(2 waiters 1 on the counter 2 cooks)= $16K Uniforms, brochures, menu cards= $500 Food supply= Everyday return, so not included. Marketing and advertising= $20K

Does the amount of cash needed in item 1 above fall within the âreasonableness rangeâ for an early stage company (i.e., up to $5 million)? Please include your numeric answer and an explanation of several sentences.

Total required amount is $301.8K which falls under the reasonable range.

What is your monthly cash burn rate - both gross and net burn (gross burn is the average of total expenses each month; net burn is gross burn offset by the average monthly cash generated from revenues). Please include your numeric answer and an explanation of several sentences.

Three workers at $200 per month and two workers of $300 per month (That's what the salaries are where I live). $1,200 salary, $300 for the electric, maintenance, gas and marketing etc every month. If in the starting months 20 people visits the restaurant and spends at least 7$ per person on food on average, they would bring $140 revenue everyday and in 30 days, $4,200, which is the revenue generated including 60% profit that the food items would generate. $2625 on the food that is being sold. A total of $4,125 is expected to be spent in the first few months, which is the gross burn. The $2,625 food that is sold will at least give 60% profit, that's calculated to be $1575. So the revenue earned each month for a first few months would be $4,200. This estimates that the net burn would be something around (4,125-4200) viz "-$75" every month for a first few months. The negative sign shows it's a profit, and that even at the estimated value their would be some room (of $75) for the accounts to balance and the venture to not fall off into loss. This is the minimum sale calculation which shows no loss. 20 people to visit in one day is a very small figure. Such a business offers an everyday recovery.

How long will you be able to operate at the end of the 12 months forecast before you need to raise additional funding? Please include your numeric answer and an explanation of several sentences.

As we will start gaining more costumers due to marketing and best quality provided, we will start making wholesome profits. At the rate of 50 costumers per day shopping at the average of $8 per costumer, we would make a revenue of $400 per day and $12,000 per month, which after deduction of food cost and other bills would give a profit of $3,000 every month, and hopefully at the end of the 12th month we will be making $6000 per month. Such a profit will help recovering the amount invested and in a few more months the business will be able to recover all the investment except the cost of the land and premises, which will of course be there as an asset.

CASE DEBATE. Write down Background/Summary , Pro Highlights and con highlights ( Min 4 points for both Pro and Cos ) for topic INSIDER TRADING. Topic / Subject: Insider Trading Background/Summary: Pro Highlights Con Highlights Everyone would like to get a stock tip that will yield a huge return on a small investment. Thatâs human nature. But stock tips can be mixed blessings. Consider the following example: Dr. Sam Waksal developed a promising cancer drug called Erbitux. As the CEO of ImClone, Waksal was an entrepreneur as well as an immunologist. Waksal sold an interest in Erbitux to the pharmaceutical company Bristol Myers for $42 million. It was a Bristol Myers executive who informed Waksal that the Federal Drug Administration (FDA) was not going to approve the drug because there were insuffi cient data to determine its effectiveness; thus, new clinical trials were needed. Investors had expected approval, and once the FDA decision was made public, ImClone stock was certain to face a sharp decline in price. At least in the short term, some people were going to lose a lot of money. One of those people was, of course, Waksal himself. He had millions of shares of ImClone. So did his family. Waksal told his daughter and father to sell their shares. In addition, Waksal transferred 79,000 of his own shares to his daughter to sell. Waksal knew that it was illegal under federal law for him or his family members to trade on inside information. And in the end, all three were indicted and later convicted of violating federal security laws. Waksal was guilty of insider trading. As we pointed out in Chapter 1, insider trading results from information asymmetry, which arises when one party in a business transaction has information that is unavailable to the other parties in the transaction. To be legally actionable, insider trading must involve information that has not been publicly announced, as you might expect. In addition, the information must be material. Material means that the information will cause a significant change in the stock priceâthe price will go either up or down as a result of the event the information concerns. Examples of material corporate events include the introduction of a new product line, an acquisition, a divestiture, a key executive appointment, and thefailure or success of a product under development. Martha Stewart Enters the Picture Waksalâs conviction is not the only part of this story. Waksal was friends with the celebrity Martha Stewart, who also owned ImClone stock. On the day before the negative FDA announcement, Stewart sold 4,000 shares of ImClone worth $230,000. Did Stewart sell her shares on the basis of inside information regarding the FDA decision? Stewartâs sale certainly looked suspicious, and the Securities and Exchange Commission (SEC) started an investigation and asked her to explain her sale. In her discussions with the SEC, Stewart did not admit to insider trading. Stewart claimed that she had a prearranged order in place to sell her Im-Clone stock when it dipped below $60 per share. The stock did dip below $60 the day before the FDA announcement. Federal prosecutors, however, alleged that she and her broker, Peter Bacanovic, had doctored stock transaction records to support her story. In the SEC indictment, it was that they did not believe her explanation. It is also interesting to note that Stewart is not alleged to have received a tip from Waksal himself. Indeed, she contacted Waksal only after the sale, when she called him to ask what was happening to the company. However, it is alleged that her broker, Bacanovic, received a tip that Waksal and his daughter had placed orders to sell shares of ImClone. Martha Stewart was eventually convicted in a criminal trial, but convicted of what? The most serious charges, which involved securities fraud and insider trading, were thrown out of court. She was convicted only of lying to investigators. However, Stewart was also charged in a civil suit, and in that suit, the insider trading charge would have been allowed in court. After serving a jail term, Stewart eventually reached an agreement with the SEC to settle the insider trading accusations. Under the agreement, she had to pay $195,000, covering her gains from the trading and penalties, although she did not admit to any wrongdoing. Conclusions What can we conclude about insider trading? The ethical issues can be analyzed at two levels: At the institutional level, we can ask whether the insider trading laws are ethical. At the individual level, we can ask why a person would engage in this illegal behavior.

FIN 101 Lecture 16: Make No Oral Agreements For Any Significant Purchases Or Sales

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