Chapter_16_Solutions - SOLUTIONS - CHAPTER 16 LO 1 FRA 1...

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Unformatted text preview: SOLUTIONS - CHAPTER 16 LO 1 FRA 1 Companies whose cash flows from operations are insufficient to cover debt re- payments may have the following options: (1) use available cash balances, (2) issue new shares of stock, (3) sell existing assets, and/or (4) issue more debt. The hotel industry generally does not have cash savings to tap into be- cause excess cash flows from the good years were used to upgrade hotels and build new properties. During a recession, stock prices are generally low, so many companies prefer not to issue stock to raise cash. Sales of existing hotels require time to arrange buyers, so while a buyer might be found, the timing of a sale may not coincide with the debt repayment schedule. Finally, lenders still have funds available but are charging rates as much as 10 percentage points higher than rates on government bonds. LO 2 SD 4 Landon's proposal is not acceptable accounting practice because no sale has taken place. Following through with this proposal would be a violation of the revenue recognition principle. In addition, it would not be ethical because it would result in fraudulent financial reporting. Although the company might be saved in the short run, there is no guarantee that the FDA will approve the drug. Even if the drug is approved, the company might ultimately be in worse condi- tion than it would be if its problem in meeting the bond indenture requirements is brought out now. The bondholders would be harmed if their investment was not protected. The stockholders, although in a probable loss situation, might lose more in the long run. Management's best course of action is to ask for a meeting with the bondholders to explain the facts of the situation. The bond-meeting with the bondholders to explain the facts of the situation....
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Chapter_16_Solutions - SOLUTIONS - CHAPTER 16 LO 1 FRA 1...

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