Imagine you are the assistant controller in charge of general ledger accounting

Question

Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30, the cash balance is $80,000. You give this update to Lisa Infante, the financial vice president. Lisa is nervous and instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”

Questions

Explanation / Answer

1) In the given case, the major accounting problem that Linbarger Company faces is related to its cash management. Since the company is bound by a contract to maintain a minimum cash balance of $200,000 each month, the company needs to properly plan its cash management to ensure the minimum balance requirement. The ways can be short-term funding, speed-up collection of Accounts Receivable etc.

2) In the given case, Lisa Infante wishes to defer closing of the cash book for one day, which is completely incorrect as there must be uniformity in closing the books and they must get closed on the last day of the period. Though Lisa is sure of getting the check in one day, it doesn’t comply with the rules. This would be a willful error that may result in cumulative errors.

3) The negative impact of not following Lisa’s instruction would be any adverse step taken by the insurance company due to breach of contract. The adverse steps include immediate loan repayment required by the insurance company, which may put a huge burden over the company resulting in immediate sell of many assets of the company resulting in cut-down in operations, which would further result in job-cuts. If the burden proves to be very big, the company may be forced to foreclosure as well.

4) The full compliance on the accounting principles would result in breach of the contract. This breach would impact every stakeholder related to the company negatively. The stakeholders includes shareholders of the company, its employees, its creditors and its supplier as each of them will get impacted by any changes in the company’s business.

5) The best way to deal with this scenario would be a very-short term loan with tenure of 2-3 days. Such loans can be availed from money markets wherein short term loans are dealt with.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.