Adapted from: Marshall, D.H., McManus, W.W., and Viele, D.F. (2008). “Accounting: What the Numbers Mean”, 8th edition. New York: McGraw-Hill Irwin.
You have been approached by the President of MT Construction Company for your advice on a number of business and accounting-related matters. Your conversation with the President, which took place in January 2011, proceeded as follows:
President: “The Accounts Receivable shown on the Statement of Financial Position as of December 31, 2010 are nearly P100 million and the funny thing is, we just collected a bunch of the big accounts in early December but had to reinvest most of that money in new equipment. At one point last year, more than P200 million of accounts were outstanding! I had to put some pressure on our regular clients who keep falling behind. Normally, I don’t bother with collections, but this is our main source of cash flows. My daughter deals with collections and she’s just too nice to people. I keep telling her that the money is better off in our hands than in someone else’s! Can you have a look at our books? Some of these clients are really getting on my nerves.”
Your reply: “That does seem like a big problem. I’ll look at your Accounts Receivable details and get back to you with some of my ideas and some questions you can help me with. What else did you want to ask me about?”
President: “The other major problem is with our long-term asset management. We don’t have much in terms of buildings, just this office you’re sitting in and the service garage where we keep most of the earthmoving equipment. That’s where the expense of running this business comes in. I’ve always said that I’d rather see a dozen guys standing around leaning against shovels than to see one piece of equipment sit idle for even an hour of daylight! There is nothing complicated about doing ‘dirt work’, but we’ve got one piece of equipment that would...