Advanced Medical Technology Corporation 1

Topics: Balance sheet, Accounts receivable, Generally Accepted Accounting Principles Pages: 9 (2940 words) Published: March 17, 2012
Jessica Betts
Cecilia Hibbard
Celeste Maldonado
Niza Oun
Jessica Betts
Cecilia Hibbard
Celeste Maldonado
Niza Oun
Advanced Medical Technology Corporation
Advanced Medical Technology Corporation

Question 12
Question 24
question 37
question 49
question 511
question 613

1. What has created the need for additional finance by AMT since 1983?

Extraordinary sales growth for AMT of 30% annually is resulting in major operating losses, and external funds are necessary to be able to continue with this rapid expansion. The net operating losses from 1983-1985 were $1,289,000 in 1983; $1,176,000 in 1984; and $1,487,000 in 1985. The bulk of these losses were a direct result of both SG&A and R&D. The President of AMT believes that sales will continue to grow at the same rate at 30% annually for the next 5 years. However, cost of goods sold and SG& A is growing at 45% and 40% respectively. In addition, accounts receivable has also continued growing at 96.75% over the last 2 years, and thus, the cash cycle time has also increased. The 2-year growth rate for R&D is high at 89.22%, which has led to a shortage in cash. All of these things have resulted in the additional need for financing by AMT to maintain its current market position and to aggressively enter new markets. The Net Working Capital of AMT is the Current Assets less the Current Liabilities. | | | | | | | | |

| 1983| 1984| 1985| 1986| 1987| 1988| 1989| 1990|
Current Assets| $7,617| $12,370| $17,700| 17,848 | 23,203 | 30,164 | 39,213 | 50,977 | Current Liabilities| $2,965| $11,056| $9,942| 4,510 | 5,853 | 7,599 | 9,869 | 12,820 | NWC| $4,652| $1,314| $7,758| $13,338| $17,350| $22,565| $29,344| $38,157|

Based on the above information, NWC has increased over the last 6 years. The current assets are made up of accounts receivable and inventories, as well as cash and cash equivalents and marketable securities. For AMT, it is important to note that a large portion of the company’s assets are tied up in accounts receivable and inventory, with a lesser portion available in cash and cash equivalents. As shown in the following chart, accounts receivable and inventory as a percentage of total assets has increased over the last 2 years at 96.75% and 71.86% respectively. | 1983| | 1984| | 1985| | Rate|

Accounts receivable| 1,549 | 16.9%| 3,359 | 20.4%| 5,996 | 28.4%| 96.75%| Inventories| 3,305 | 36.1%| 6,782 | 41.2%| 9,762 | 46.3%| 71.86%|

As we have discussed, AMT has not been efficient on their collection of accounts receivable. In calculating the Receivables Turnover, which is the sales/accounts receivable, we see that AMT’s turnover rate is decreasing from October through December of 1985. This shows that the rate of collection of receivables has increasingly slowed, thus slowing the turnover to lend the money again. Accts Receivable Turnover| December| 1.122786759|

| November| 1.405820106|
| October| 4.354066986|

Lastly, AMT is taking an increasingly long time between the time it pays for its raw materials and the time it collects on the sale of the finish products. This represents the Cash Cycle and is representative of the Operating Cycle less the Accounts Payable period. The cash cycle for 1983, 1984 and 1985 are as follows: Cash Cycle| 181.35 | 239.76 | 277.31 |

Because the time it takes to pay for materials versus the time to collect on the sale of those materials has increased, the availability of cash to continue to buy raw materials is decreasing, thus creating a need for available financing.

2. Is amt profitable? how much cash is required for its operations?

In reviewing AMT’s income statements it is apparent that they are not profitable, but it takes a closer analysis of their financials to identify the underlying reasons. In the statement below AMT is showing...
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