a. What evidence can you observe from analyzing the financial statements that might signal the cash flow problems experienced in mid-Year 14?
There are a few factors that attributed to the cash flow problem in year 14. First, one of the most important areas that shows how liquid of a position a company has is by analyzing the difference in the current ratio and quick ratio over a period of time. The current ratio is current assets divided by current liabilities and the quick ratio is current assets subtracted by inventory, divided by current liabilities. From the chart below we can see that there was significant drop off from Year 12 to Year 13. During Year 13 Management should have determined that there was a significant decline in liquidity and changes should have been made. [pic]The next factor that is important to analyze a company the operating results of the company. The most prevalent of these are operating margin and net income margin. Please see below for the trends of the three. Operating margin is computed by taking operating income and dividing it by revenue and net income margin is computed by taking net income and divide it by revenue. [pic]
From the chart we can see that there is a declining trend in both operating margin and net income margin in Year 13 and 14. Management should have determined that there were significant problems starting in year 13.
B) Can FBN avoid bankruptcy during Year 15? What changes in either the design or implementation of FBN's strategy would you recommend?
I believe that FBN did a horrific job in analyzing its performance leading up to Year 15. If they would have just analyzed the trends they would have been able to determine that the company is heading toward bankruptcy. I believe that if the steps listed below are taken there is a possibility they could avoid bankruptcy.
1. Many of FBM’s managers are also part of...