Task 1: Alternative Distributor Corp., a distributor of groceries and related products, is headquartered in Medford, Massachusetts.
During a recent audit, Alternative Distributor Corp. was advised that existing internal controls necessary for the company to develop reliable financial statements were inadequate. The audit report stated that the current system of accounting for sales, receivables, and cash receipts constituted a material weakness. Among other items, the report focused on non-timely deposit of cash receipts, exposing Alternative Distributor to potential loss or misappropriation, excessive past due accounts receivable due to lack of collection efforts, disregard of advantages offered by vendors for prompt payment of invoices, absence of appropriate segregation of duties by personnel consistent with appropriate control objectives, inadequate procedures for applying accounting principles, lack of qualified management personnel, lack of supervision by an outside board of directors, and overall poor recordkeeping.
Instructions
(1) Identify the principles of internal control violated by Alternative Distributor Corporation.
(2) Explain why managers of various functional areas in the company should be concerned about internal controls.
Task 2:
You are a loan officer for Lakeland Bank of Port Washington. Edmund Jeffries, president of E. Jeffries Corporation, has just left your office. He is interested in an 8-year loan to expand the company’s operations. The borrowed funds would be used to purchase new equipment. As evidence of the company’s debt-worthiness, Jeffries provided you with the following facts.
2007 2006
Current ratio 3.1 2.1
Asset turnover ratio 2.8 2.2
Cash debt coverage ratio .1 .2
Net income Up 32% Down 8%
Earnings per share $3.30 $2.50
Jeffries is a very insistent (some would say pushy) man. When you told him that you would need additional information before making your decision, he acted offended, and said, “What more could you possibly want to know?” You responded that, at a minimum, you would need complete, audited financial statements.
Instructions:
(Q1) Explain why you would want the financial statements to be audited.
(Q2.) Discuss the implications of the ratios provided for the lending decision you are to make. That is, does the information paint a favorable picture? Are these ratios relevant to the decision?
(Q3.) List three other ratios that you would want to calculate for this company, and explain why you would use each.