Chapter 6 - Cash, Short-Term Investments, and Accounts and Notes Receivable

Debt crisis reality check: EU’s bad debt won’t go away

"The debt crisis for the weakest members of the EU has gone too far. Their bad debt will have to be restructured."

Summary:
Near-bankrupt Greece has been helped in the short term by a $1 trillion European Union plan to contain the spreading debt crisis. But Europe’s bad debt will not disappear without restructuring. The debt crisis, haunted by Europe, in America is from the bad debt in the private sector – led by subprime mortgages, caused havoc on Wall Street in autumn of 2008. The federals, as a result, practically moved the debts from one debtor to another, and also putting at risk an additional $8 trillion of the taxpayer’s dollar. Europe tries to restructure their bad debt because their debt is in the public sector. The $1 trillion bailout program calls for transferring this debt onto the taxpayers of the larger, more solvent states.

Accounting for Bad Debts:
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed. This usually occurs when the debtor has declared bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself. The book talks about bad debt in using methods such as the Allowance Method and doubtful accounts, these governments must have used these methods but it does not seem to be working because of the great amounts of money involved with these bad debts. “Doubtful debts are those debts which a business or individual is unlikely to be able to collect. The reasons for potential non payment can include disputes over supply, delivery, and conditions of goods, the appearance of financial stress within customers operation.”

Reflection:
I think that governments such as Europe and America should look at ways to fix up this mess. For example, looking at Ireland; when the world markets were turned down in 2007, the Emerald Isle faced ruin. Like Britain and America, it had overdone it. Its banks, its households and its government had too much debt. At the brink, it took a knife to public spending, pledging to cut 7.5% of GDP out of the government’s budget. It was not too late for the Irish, for they have a nation debt equal to only 50% of the GDP (about third of the Greek total.) approximately, with a modest GDP growth of only 2.5% annually the Irish could sustain their debt indefinitely. If they stick to the program, the debt problem could disappear.

Chapter 5 - Cash Flow Statement

Rolls-Royce expects flat year

Summary:
Rolls-Royce continues to expect underlying revenue and profits level with 2009 despite a modest cash flow in 2010. Chief executive Sir John Rose says, in this AGM and interim management statement: 'Whilst we are seeing signs of stabilization and modest improvement in some parts of the global economy, to which our businesses are exposed, the overall environment remains challenging.” As Rolls-Royce continues to produce energy machines and systems, additional pressure has been placed on some of their customers by the recent disruption to the European aviation industry as a result of the volcanic eruptions in Iceland.

Cash Inflow/Outflow:
Ideally, during the business cycle, companies will have more money flowing in than flowing out. This will allow them to build up cash balances with which to plug cash flow gaps, seek expansion and reassure lenders and investors about the health of their business. With Rolls-Royce’s inconsistent cash flows, they have a hard time balancing their cash balance a hard time to reassure investors. Some example of cash inflow include: Payment for goods or services from your customers, receipt of a bank loan, interest on savings and investments, and shareholder investments. Some examples of cash outflow include: purchase of stock, raw materials or tools, wages, rents and daily operating expenses, purchase of fixed assets - PCs, machinery, office furniture, etc. , loan repayments, dividend payments, income tax, corporation tax, VAT and other taxes, and reduced overdraft facilities.

Reflection:
Rolls-Royce comments on their trading performance in the year to date has been consistent with their expectations and their current view of the full year performance remains in line with that at the time of their preliminary results in February 2010. Although their industry has been hit hard with unfortunate events such as natural disasters, I believe that the company’s future should be quite good because of new aviation technologies and the demand of new systems and mechanics. “As a result, we continue to expect underlying revenue, underlying profits and average net cash balances to be broadly similar to those achieved in 2009 despite a modest cash outflow in 2010”, Chief executive Sir John Rose concludes.

Chapter 4 – Revenue Recognition

Slot machine-maker IGT profit rises 7 pct

Summary:
Slot machine maker International Game Technology (IGT.N) posted a 7 percent rise in quarterly profit as some of its casino customers coming back from the recession replaced old machines. Chief Executive Officer Patti Hart, speaking on a conference call on Thursday, said “IGT remains cautiously optimistic, but is more enthusiastic about specific metrics including an uptick in play levels.” She adds, “Gaming operations revenue rose 5 percent from the previous quarter, reflecting a slight increase in play levels, while replacement slot machine sales improved 37 percent over the same comparison period.”

Revenue Recognition:
Chapter 4 mentions many times about revenue recognition and how it works, I thought that IGT would have a bright future because gambling and gaming is always a sector that will generally improve in the future. With more casinos opening and older casinos purchasing new slot machines, etc. IGT is doing very well in terms of profits and stock price increases. IGT has not received any complaints regarding the accounting principles and their income report seems to highlight this.

Reflection:
After doing a assignment on reporting bad accounting practices for major companies (such as Squibb Myers), I wanted to write a little bit about companies that follow good accounting practices and are legitimately successful. "An improvement in replacement units shipped, an increase in gaming operations yields and a decline in SG&A (sales, general and administrative costs) all reflect IGT's continued efforts to navigate our business through an operating environment which remains challenging," Hart said in a statement. And now with more and more casinos and venues opening up in many different parts of the world (Macau in China for example) I think that companies like IGT will experience more profit gains in the future.

Chapter 3 – Processing Data through the Accounting System

National Bank Q1 profit rises, beats Street

Summary:

Canada’s sixth largest chartered bank, the National Bank of Canada, said their profits in their first quarter more than tripled. Their earnings rose from $69 million to $215 million in the previous year earlier. The results from both quarters were skewed by the bank's involvement in the asset-backed commercial paper mess. Although, in the most recent quarter, profit suffered because of a $75 million penalty the bank had to pay to regulators for its role in the ABCP (Asset-Backed Commercial Paper) situation. A year ago, the bank recorded a $184-million charge for its holdings of ABCP.

Extraordinary Items:

National Bank's quarterly results included a $75 million regulatory penalty related to asset-backed commercial paper, or ABCP. An ABCP is a short-term investment vehicle with a maturity that is typically between 90 and 180 days. The security itself is typically issued by a bank or other financial institution. The notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs. This is a good example of an extraordinary item because this can be classified as an item that is not typical of the company’s normal business activities, not expected to occur frequently, and is not the result of actions or decision made by the management or owners of the company.

Reflection:

The strategy in using an ABCP is so that a company or group of companies looking to enhance liquidity may sell receivables to a bank or other conduit, which, in turn, will issue them to its investors as commercial paper. The commercial paper is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the bank or conduit, which then passes these funds on to the note holders. The national bank using the ABCP’s will have a hard time in the future because these extraordinary items are not useful for assessing management’s performance or predicting future results.

Chapter 2 - Business Transaction Analysis and Financial Statement Effects

Tim Hortons opens coffee and doughnut shop at military base near Fort Knox

Summary:

With the position of King of Canada’s coffee and doughnut industry, Tim Hortons Incorporated is setting up a shop near Fort Knox, which is home to the U.S. government’s main gold storehouse. “The new 24 hours Tim Hortons shop in Kentucky will be its first on the grounds of a U.S. military facility”, states Tim Hortons CEO’s. As a strategic and operation activity, Tim Horton’s is growing its presence aggressively in these types of locations, opening several locations in New York City last summer. As another location operating near popular tourist destinations, Tim Hortons is taking advantages of these tourist “hotspots” and earning much more revenue by investing and opening new locations throughout the states.

Operating Activities:

In order to make wise decisions and generate more income, companies and accountants must analyze the economic substance of the transactions in order to decide what accounts are affect and by how much. This is called transaction analysis. With this information, companies can make wise decisions and invest with confidence in new projects and buildings, for example. Expanding the franchise of Tim Hortons coffee and doughnuts by locating them near the states and tourist hotspots is a wise choice because it will spread the relations with the world and our neighbor, the states. The Ontario based company has about 500 stores in the United States and about 3,500 locations in total, most of them in Canada.

Reflection:

As an occasional customer of Tim Hortons, I believe that the company should definitely evolve and open up new locations to introduce their franchise to other people. As Tim Hortons is still growing in the states, for example, their decision to open locations in tourist hotspots is a good move because people from around the world will be able to try out their doughnuts and coffee. With decision making, analyzing transaction records and company books is a must in order to make accurate and successful choices. I notice a trend as other companies, such as Walmart and Krispy Kreme, are originating from the United States and growing into Canada.

Chapter 1 - Overview of Corporate Financial Reporting

Barclays In New Lehman Scrap

Summary:

A year on after the collapse of Lehman Brothers, the takeover of the bank’s assets is finally coming back to the Barclays Capital. The trustee of the bank’s estate is requesting a refund of $8.2 billion or more on the grounds that the British bank landed itself because of assets that it received were not intended to be part of the “deal”. The claim has been condemned as “opportunistic” by Barclays Capital based on a “meritless argument” and an attempt to re-trade a deal after the economy has stabilized. The two sides have till October 15 when a hearing is scheduled to take place at the Bankruptcy Court, southern New York.

Ethics in Accounting:

As stated in the textbook, the management of a company, through the direction given to it by the board of directors, has both a moral and a legal obligation to safeguard the investment shareholders have entrusted to it. Shareholders typically provide some incentives for and controls over management, to ensure that management fulfills this stewardship function with regard to company resources. Additional compensation arrangements, like stock option plans and bonuses, are often tied to the company’s financial performance and provide incentives for management to make decisions that are in the best interests of the shareholders.

Reflections:

In the case of ethics in accounting, Lehman’s bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years prior in 2008. As a result of fraud and contract terminations with Lehman’s, shares tumbled over 90% on September 15, 2008. As a result, the Dow Jones closed down just over 500 points. As a result of bad ethics in accounting and deals, this caused a very successful bank to fall and go bankrupt, most likely disrupting many other companies and individual’s books. With such strong banks failing, the economy takes a great hit with everyone affected, even a year after.