After investigating the different forms of business organization, Candy Johnson decides to operate her business as a corporation, All Things Respiratory and she begins the process of getting her business running.
While at a trade show, Candy is introduced to Gerry Rich, operations manager of “Bayou Clinic,” a national medical facility. After much discussion, Gerry asks Candy to consider being Bayou Clinic’s major supplier of respiratory equipment. He provides Candy with the most recent copy of the financial statements of Bayou Clinic. He expects that Candy will need to supply Bayou Clinic’s warehouse with approximately $500,000 worth of respiratory supplies and services a week. Candy is to send Bayou Clinic a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Bayou Clinic’s Michigan office.
Candy is thrilled with the offer. However, she has recently read in the newspaper that Bayou Clinic has a reputation for paying late, not at all, or claiming they never received the inventory or services. Others are not jumping at the opportunity to be on the payroll for Bayou Clinic, especially a new start-up.
Candy has several questions. Answer the following questions for Candy.
(a) What type of information does each financial statement provide?
(b) What financial statements would Candy need in order to evaluate whether Bayou Clinic will have enough cash to meet its current liabilities? Explain what to look for.
(c) What financial statements would Candy need in order to evaluate whether Bayou Clinic will be able to survive over a long period of time? Explain what to look for.
(d) What financial statement would Candy need in order to evaluate Bayou Clinic’s profitability? Explain what to look for.
(e) Where can Candy find out whether Bayou Clinic has outstanding debt? How can Candy determine whether Bayou Clinic would be able to meet its interest and debt payments on any debts it has?
(f) How could Candy determine whether Bayou Clinic pays a dividend?
(g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Candy should be aware of?
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