Raintree Cosmetic Company Case

Topics: Balance sheet, Asset, Inventory Pages: 5 (1036 words) Published: October 10, 2012
BUS A311
Case # 1

Raintree Cosmetic Company Case

Analytical Model Steps

1. Facts:

* Raintree must maintain a current ratio of at least .9 in order to maintain the terms of the debt agreement in place with the bank. If Raintree fails to do so, the cost of borrowing from the bank will likely increase.

* Raintree company controller, Jackson Phillips, estimates that the 2013 year-end assets and liabilities will be $2,100,000 and $2,400,000 respectively. This scenario would put Raintree’s current ratio at .875, .025 lower than the required benchmark according to the terms of the financing covenant with the bank.

* Jackson Phillips recommends purchasing an additional $600,000 worth of inventory on credit in order to increase the current ratio to .9.

* This purchase will create a swell of inventory that will be on hand through the later part of 2014, indicating no need for the inventory except as an accounting trick.

* This purchase will cause warehousing and financing costs as well as current liabilities and current assets to increase.

2. Ethical Issues and Stakeholders:

* The ethical issue is centered on the two diametrically opposed decisions that Jackson Phillips is faced with in his role as Raintree Company Controller. Does Phillips have a greater ethical duty to protect his firm’s current financing covenant terms by going forward with the purchase, or is Phillip’s duty to the stakeholder’s, to produce accurate and honest documents, greater than the aforementioned duty to his firm’s internal financing integrity.

Stakeholders include

* Jackson Phillips
* All Raintree Corporate Executives and employees at all levels * The bank currently financing Raintree operations
* Future Creditors
* Investors both current and future

3. Values:

* Honesty
* Duty to produce accurate financial statements
* Company loyalty
* Personal Integrity/Integrity of office
* Objectivity

I believe that values important to Jackson Phillips in this case are at odds with each other dependent upon his actions. Phillip’s honesty, integrity, objectivity and duty to produce accurate financial statements are diametrically opposed to company loyalty, in this case, because failure to go forward with the proposed purchase of $600,000 worth of inventory will preserve Phillip’s objectivity, honesty, integrity of both Phillips and the company as well as the accuracy of financial statements. In the event that Phillips goes forward with the plan to purchase the additional $600,000 inventory, Phillips’s objectivity and honesty as well as the integrity of both Phillips and the company become compromised in pursuit of an activity that will serve to preserve Phillip’s embodiment of company loyalty.

4. Alternatives:

* A -Purchase $600,000 worth of inventory so that the current ratio improves to the agreed upon .9.

* B-Fail to order additional inventory and let the current ratio sit at .875.

* C-Attempt to negotiate with the bank in order to preserve the present borrowing cost at the present current ratio level of .875.

5. Evaluation of Alternatives in Terms of Values:

* A – Alternative (A) displays loyalty to the company de to an attempt to maintain present borrowing costs.

* B – Alternative (B) displays adherence to the values of honesty, objectivity and personal as well as company integrity as far as users of Raintree financial statements. * C – Alternative (C) displays adherence to the values of honesty, objectivity and personal as well as company integrity to the bank and potential creditors.

6. Consequences:

Alternative (A):

Positive Consequence: Jackson Phillips pleases the company officers by evading higher financing costs via the inventory purchase. The current ratio improves to the agreed upon .9.

Negative Consequence: Raintree financial statements reflect an...
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