Question

Eric Page, the CEO of Marvick Enterprises, has been concerned with the firm’s days’ sales in receivables, which are running substantially higher than the past. He directs the CFO to get on top of the situation and reduce days’ sales in receivables.
The CFO reviews the receivables and finds that the problem is substantially with one customer that owes $ 10 million to Marvick Enterprises that was 120 days old. The CFO contacts the customer who informs him that they had a temporary liquidity problem relating to a storm that disrupted the business of several of their customers.
The CFO agrees to help out by converting the receivable to a one- year note, paying 6%. This should give the customer adequate time and result in additional revenue for Marvick Enterprises. The customer agrees to those terms and signs the note.

Required
a. Will the substitution of the note receivable for the account receivable reduce days’ sales in receivable?
b. Will the substitution of the note receivable for the account receivable improve the liquidity of Marvick Enterprises?
c. Do you consider this situation to be ethical? Comment.



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  • CreatedMay 28, 2014
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