Montgomery Case

Topics: Balance sheet, Accounts receivable, Generally Accepted Accounting Principles, Accounts payable, Finance / Pages: 3 (537 words) / Published: Jul 22nd, 2013
Case Study Analysis – Montgomery Ward

Year 9 * In the year, the company witnessed a significant increase in accounts receivable, which could be due to acquisition of Lechmere and its assets may have been added to Montgomery’s revenue * The company also witnessed an increase in its accounts payable—this could also be a transfer from Lechmere * Montgomery’s cash outflow from investing activities increased drastically due to the acquisition. To finance this acquisition, the company had to take a short term loan of $144 million and additional long term loan of $68 million and issue of capital stock—signifying increased pressure on its balance sheet by drastically increasing the liabilities * The company off-loaded some of its previous long term borrowing—which might be due to a refinancing activity as we also see an increase in borrowings
During the year, although the company witnessed an increase of 17.2% in sales, its cash balance reduced by 66%. The acquisition increased a lot of debt on company’s balance sheet – not justified by the increase in sales. This could have the beginning of the fall.
Year 10 * In the year, firstly the company had a net loss and secondly, the company had an outflow of a deferred tax liability, which resulted in negative working capital from operations * Further, an increase in inventories and account receivable and decrease in other current liabilities led to a negative cash flow from operations * The company further acquired assets in the year, which led to outflow of cash from investing activities—leading to further fall in cash reserves * The company tried to finance the above mention outflows through increase in long-term borrowing and issue of capital stock—ultimately leading to a marginal increase in its cash reserves over the previous year
Despite a fall in sales, the company continued to acquire assets, which resulted in cash outflow. Further, reversal of deferred tax liability added to extra

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