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Bank Suva was the oldest and largest of the three in a city in a city of 2 million people. Profits had stagnated in recent years. The president was concerned about the erosion of the bank's profitability and wanted to turn the situation around. A research consultant, who was completing his doctorate in business administration, was asked to help the president.
Preliminary discussions between the research consultant and the president indicated that a decline in the level of deposits affected profits. The deposits were linked to the bank's competitive position.
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- Glencoe First National Bank operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, First Nationals efforts were directed toward increasing total dollars of sales and total dollars of account balances. In recent years, however, First Nationals profits have been eroding. Increased competition, particularly from savings and loan institutions, was the cause of the difficulties. As key managers discussed the banks problems, it became apparent that they had no idea what their products were costing. Upon reflection, they realized that they had often made decisions to offer a new product which promised to increase dollar balances without any consideration of what it cost to provide the service. After some discussion, the bank decided to hire a consultant to compute the costs of three products: checking accounts, personal loans, and the gold VISA. The consultant identified the following activities, costs, and activity drivers (annual data): The following annual information on the three products was also made available: In light of the new cost information, Larry Roberts, the bank president, wanted to know whether a decision made two years ago to modify the banks checking account product was sound. At that time, the service charge was eliminated on accounts with an average annual balance greater than 1,000. Based on increases in the total dollars in checking, Larry was pleased with the new product. The checking account product is described as follows: (1) checking account balances greater than 500 earn interest of 2 percent per year, and (2) a service charge of 5 per month is charged for balances less than 1,000. The bank earns 4 percent on checking account deposits. Fifty percent of the accounts are less than 500 and have an average balance of 400 per account. Ten percent of the accounts are between 500 and 1,000 and average 750 per account. Twenty-five percent of the accounts are between 1,000 and 2,767; the average balance is 2,000. The remaining accounts carry a balance greater than 2,767. The average balance for these accounts is 5,000. Research indicates that the 2,000 category was by far the greatest contributor to the increase in dollar volume when the checking account product was modified two years ago. Required: 1. Calculate rates for each activity. 2. Using the rates computed in Requirement 1, calculate the cost of each product. 3. Evaluate the checking account product. Are all accounts profitable? Compute the average annual profitability per account for the four categories of accounts described in the problem. What recommendations would you make to increase the profitability of the checking account product? (Break-even analysis for the unprofitable categories may be helpful.)Better Days Ahead, a charitable organization, has a standing agreement with First National Bank. The agreement allows Better Days Ahead to overdraw its cash balance at the bank when donations are running low. In the past, Better Days Ahead managed funds wisely and rarely used this privilege. Jacob Henson has recently become the president of Better Days. To expand operations, Henson acquired office equipment and spent large amounts on fundraising. During Henson’s presidency, Better Days Ahead has maintained a negative bank balance of approximately $10,000. What is the ethical issue in this situation, if any? State why you approve or disapprove of Henson’s management of Better Days Ahead’s funds.ABC Corporation (the "Company") incurred heavy losses over the past 10 years resulting in deficit and liquidity problems. The Company considers borrowing from different banks as a way to produce more funds for the company to continue operation and possibly, recover from losses. However, banks are afraid to grant loans to the Company due to recent issues with fraudulent issuance of financial statements by the companies just to obtain loans.In line with the above scenario, what good corporate governance practices may be implemented by the company to increase the confidence of banks (lenders) and avoid the high probability of issuing misstated financial statements by the company? - Have an independent external audit - Require internal audit to conduct examination/audit of Company’s FS - Have the financial statements certified by BIR, Management, and SEC before submission to Banks - Increase integrity and loyalty of BOD
- Otis is the CEO of Bay Corp. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants. Otis is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Otis undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light? Inventory turnover Quick ratio Collection ratio Profit marginCarson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other individuals. Over time, Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rates on those loans are tied to market interest rates and are adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to interest rate movements. The company has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. Carson Company has assets valued at approximately $50 million and generates sales of nearly $100 million per year. Some of its growth is attributed to its acquisitions of other firms. Because it expects the economy to be strong in the future, Carson plans to grow by expanding its business and…Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the Situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses. Required: According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for Perlman not to report the inventory…
- Jacqueline Mensah, manager of Expert Building Company, is a valued and trusted employee. She has been with the company from its start two years ago. Because of the demand of her job, he has not taken a vacation since she began working. She is in charge of recording collections on account, making the daily bank deposits, and reconciling the bank statement. Late last year, clients began complaining to you, the Managing Director, about incorrect statements. As Managing Director, you want to investigate this matter. Jacqueline tells you there is nothing to worry about. The problem is due to the slow mail: customers payments and statement are crossing in the mail. Because clients were not complaining last year, you doubt the mail is the primary reason for the problem. Required: What might be some of the reasons for the delay? What should be done to make sure the problems are avoided in the future?An employee, Fred, working in the accounts office of a medium-sized company listed on the Nairobi Stock Exchange, was working late one evening during the week. He realized he had left his pen in the boardroom at an earlier meeting and, given its value, went upstairs to look for it. As he approached the door he heard the following discussion:‘Chief Executive: I am deeply concerned that if this fall in profit figures is disclosed in the next annual report, there will be sorts of problems with the shareholders. We may even lose a number of big investors.Non-executive director (also the cousin of the Chief Executive): (large sign) well, I suppose we could always find a way of making them look better.Chief Executive: How? I can’t see it at all.Non-executive director: Well, we could make them just slightly higher than last year’s figures by including the proceeds of sales of our toothbrush division.Chief Executive: But the sale doesn’t go through until October.Non executive director: No, but…"We must get it," Erickson Santos, president of Industrial Fasteners, roared. "Without it, we're in big trouble." The "it" Mr. Santos referred to is the renewal of a $20 million loan with Manila First Bank. The big trouble he fears is the lack of funds necessary to repay the existing debt and few, if any, prospects for raising the funds elsewhere. Mr. Santos had just hung up the phone after a conversation with a bank vice-president in which it was made clear that this year's statement of cash flows must look better than last year's. Mr. Santos knows that improvements are not on course to happen. In fact, cash flow projections were dismal. Later that day, Timothy Dela Cruz, assistant controller, was summoned to Mr. Santos's office. "Dela Cruz," Santos barked, "I've looked at our accounts receivable. I think we can generate quite a bit of cash by selling or factoring most of those receivables. I know it will cost us more than if we collect them ourselves, but it sure will make our cash…
- Penco Ltd’s board of directors are looking into expanding the company’s business operations. Before investing in a new product, the board conducted one focus group, and based on this one bit of feedback, invested $5m of company funds to develop the product. Within two years, the company had lost $8m due to poor sales. Shareholders are furious and wish to hold directors personally liable for this loss. Analyse the likely outcome for directors if shareholders were to accuse the board of breaching CA s 180.You are an assistant in the accounting department of Hasher Electronics, a small electronicsretailer. Hasher has a loan that requires the company to maintain a minimum cash balance of$125,000, as reported on its year-end balance sheet. Although Hasher has struggled in recent years,as of yesterday it looked as though Hasher would be able to meet this requirement. The cash balance in Hasher’s general ledger was $130,000 and the company’s credit manager was expecting toreceive a $30,000 electronic funds transfer that day on account from your biggest customer. Yourdepartment supervisor had been worried about meeting the loan requirement, so she had delayedmaking payments to Hasher’s suppliers for several days. But in anticipation of receiving the EFT,she decided yesterday to issue checks to suppliers totaling $15,000.It is now the last day of the fiscal year and your supervisor approaches you with a problem.Your big customer had backed out at the last minute, indicating it had “some…The auditor worked for this client for years. But before accepting or continuing with the client, What are the reasons the auditor or audit firm should or should not retain this existing client this time around using the information below about the client? What risks could the client, its business, and its environment pose to the auditor or audit firm? The client: Although client cash flows have been stable, the disruption caused by the 2020 global pandemic made it difficult for retail lessors to pay their rent on time. Due to the company's tenant-friendly approach, retail clients were allowed to renegotiate their lease and temporarily pause rent payments between June 2020 and July 2021, shifting those payments to the last 12 months. Most of these leases will expire in the next two years, including all retail companies unable to pay their rent. However, they estimate that they will receive all the lost cash flow from these tenants within a couple of years. Currently, the company is a…
