Raintree Cosmetic Company Case
BUS A311
Case # 1
9/19/2012
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
Case # 1
9/19/2012
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