Fly-By-Night

Topics: Balance sheet, Accounts receivable, Asset Pages: 19 (556 words) Published: September 27, 2013
Fly-­‐By-­‐Night
 International
 Group
 

 
A.
 
The
 cash
 flow
 problem
 experienced
 by
 FBN
 is
 the
 result
 of
 several
 factors.
 
The
 greatest
 factor
 contributing
 to
 the
 cash
 flow
 problem
 is
 the
 significant
 increase
 
in
 property,
 plant,
 and
 equipment
 in
 years
 13
 and
 14.
 Over
 this
 period,
 the
 account
 
increased
 from
 approximately
 $24
 million
 to
 $106.5
 million.
 Although
 the
 company
 
was
 experiencing
 exceptional
 growth
 in
 sales
 over
 this
 period,
 the
 resulting
 cash
 
flows
 were
 insufficient
 to
 cover
 the
 asset
 acquisitions.
 This
 shortcoming
 resulted
 in
 
the
 company
 over-­‐relying
 on
 long-­‐term
 debt
 to
 finance
 its
 purchases.
 
The
 increase
 in
 long-­‐term
 debt
 is
 also
 a
 contributing
 factor
 to
 FBN’s
 cash
 flow
 
problem.
 As
 a
 result
 of
 the
 company’s
 debt,
 its
 interest
 expense
 has
 also
 increased
 
substantially.
 In
 year
 14,
 interest
 expense
 reached
 $9.8
 million,
 a
 211%
 increase
 
over
 year
 13.
 
While
 FBN’s
 sales
 increased
 by
 50%
 from
 year
 13
 to
 year
 14,
 it
 had
 some
 
accounts
 that
 increased
 rather
 disproportionately
 over
 this
 year.
 The
 company’s
 
selling
 and
 administrative
 expense
 increased
 by
 $2.8
 million
 or
 95%
 and
 its
 
inventory
 increased
 by
 $2.5
 million
 or
 103%.
 
Other
 items
 that
 may
 be
 worth
 noting
 when
 discussing
 FBN’s
 cash
 flow
 
problem
 include
 the
 increase
 in
 accounts
 receivable,
 prepayments,
 and
 the
 
$211,000
 bonus
 paid
 to
 Mather
 despite
 the
 net
 loss
 for
 the
 year.
 Although
 the
 
accounts
 receivable
 and
 prepayments
 do
 not
 appear
 to
 be
 out
 of
 line,
 these
 accounts
 
should
 be
 properly
 monitored
 especially
 when
 a
 company
 begins
 to
 experience
 cash
 
flow
 issues.
 

 

B.
 

FBN
 is
 in
 a
 very
 difficult
 position
 as
 it
 pertains
 to
 its
 possible
 bankruptcy
 in
 

year
 15.
 FBN
 has
 mismanaged
 its
 assets
 and
 liabilities
 and
 it
 has
 grossly
 violated
 its
 
debt
 covenants.
 Its
 liabilities/tangible
 net
 worth
 is
 5.26,
 over
 twice
 its
 minimum
 
limit.
 FBN’s
 tangible
 net
 worth
 is
 $16.3
 million,
 nearly
 $4
 million
 below
 its
 target
 
tangible
 net
 worth.
 Its
 working
 capital
 in
 year
 13
 was
 negative
 $17.5
 million
 and
 
after
 reclassifying
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