- Katherine had to rush to the bank every few months to borrow more money. She didn't really talk to her banker about her financial situation because she had no trouble getting larger loans. You see, she was always on time with her payments. Katherine always took trade discounts to save money on her purchases. That is, she paid all of her bills within 10 days in order to save the 2% discount offered by her suppliers for paying so quickly.
- Katherine's products were mostly purchased on credit. They'd buy a few lamps and a pot, and Katherine would let them pay overtime. Some were extremely slow to pay her, taking six months or more.
- Katherine noticed a small drop in her business after three years. The local economy was struggling, and many people were losing their jobs. Nonetheless, Katherine's business remained steady. Katherine received a phone call from the bank one day, informing her that she was behind on her payments. She explained that she had been so preoccupied that she had missed the bills. The issue was that Katherine did not have enough money to pay the bank. She frantically called several customers for payment, but none of them could pay her. Katherine had a classic cash flow problem.
<h3>How is it possible to have high sales and high profits and run out of cash while running a business?</h3>
It is entirely possible if you have a high level of accounts receivables and inventory and a low level of accounts payables. A sale is recorded when an invoice is raised, and a shipment is delivered; this does not always imply that you received cash and that it is recorded in your accounts receivable. Similarly, if you keep a lot of inventory, a lot of your money is locked up until the inventory is sold. On the contrary, if your payment terms with your suppliers are less favorable, you will end up paying before your receivables convert to cash. As a result, high sales and profits do not always imply a strong cash position.
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Answer:
(A) True
Explanation:
A corporation just requires a basic incorporation state, through which the legal identity of its incorporation is created. After that it does not require to incorporate in all the states where the business is being conducted.
As per the law, there shall be at-least a different legal identity then that of the individual to conduct such business. Law does not demand separate incorporation.
Thus, the above statement is
True.
Answer:
1. Which of the excluded items represent ongoing costs of running the business and which are one-time "special" costs?
it depends on the company and the actual transactions, e.g. equity based compensation might be a one time special cost because it occurred only once and is doubtful that it happens again. But if the company regularly rewards its top managers with this type of compensation, then it is an ongoing cost. E.g. Tesla awarded a HHHHUUUUUUGGGGGGGEEEEEEE bonus to Elon Musk (worth hundreds of millions) but it was a one time event. While many companies use equity compensation on a regular basis.
Severance and related employee "rebalancing" costs generally take place when a company fires a lot of people because it is cutting down some division or product line. Hopefully, they should never happen, and if they do, it should be only a one time event.
Fees paid to consultants and interest expenses are ongoing costs that will probably occur in the future.
Losses related to the abandonment of excess facility space and a facility fire should be one time events. It would be really bad for them to keep happening (same as severance and rebalancing costs)
Answer: $0
Explanation:
Forward contracts get their value from the cost and on December 1, there was no cost to Curtis as he Curtis had just signed the contract.
This means that the amount that should be recorded for the Forward Contract should be $0. Even though the contract is valued at $0, it will still need to be credited against the amount to be received to at least recognize that a forward contract was entered into.
Answer:
A. Total assets will increase at the same rate as sales.
Explanation:
<em>Option E</em> is wrong because dividends will not increase at the same rate; therefore, retained earnings will not increase at the same rate as sales.
<em>Option D</em> is incorrect because sales are increasing, which leads to a different profit margin.
As sales increases to a specific percent, owners' equity will not remain constant. So, <em>option C</em> is wrong.
<em>Option B</em> is wrong because long-term debt will not change.
Option A is correct because if sales are credit sales; therefore, total assets will increase at the same rate as sales.
