Martha now has the task of collecting the necessary

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Martha now has the task of collecting the necessary information, evaluating its implications, and preparing a recommendation for action. The recession that plagued the U.S. economy starting in 2008 caused serious, though hopefully temporary, problems for companies like Golden Egg. On top of this, disastrous droughts for two straight summers had devastated vegetable crops in the area, leading to a drastic curtailment of demand for produce shipping containers. In light of the softening demand, Golden Egg had aggressively reduced prices in 2011 and 2012 to stimulate sales. Higher sales, the company believed, would allow it to realize greater economies of scale in production and to ride the learning, or experience, curve down to a lower cost position. Golden Egg’s management had full confidence that normal weather and national economic policies would revive the ailing economy and that the downturn in demand would be only a short-term problem. Consequently, production continued unabated, and inventories increased sharply.
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In a further effort to reduce inventory, Golden Egg relaxed its credit standards in early 2012 and improved its already favorable credit terms. As a result, sales growth did remain high by industry standards through the third quarter of 2012, but not high enough to keep inventories from continuing to rise. Further, the credit policy changes had caused accounts receivable to increase dramatically by late 2012. To finance its rising inventories and receivables, Golden Egg State turned to the bank for a long-term loan in 2011 and also increased its short-term credit lines in both 2011 and 2012. However, this expanded credit was insufficient to cover the asset expansion, so the company began to delay payments of its accounts payable until the second late notice had been received. Management realized that this was not a particularly wise decision for the long run, but they did not think it would be necessary to follow the policy for a very long---the 2012 summer vegetable crop looked like a record breaker, and it was unlikely that a severe drought would again hurt the crop. They also predicted that the national economy would pull out of the weak growth scenario in late 2012. Thus, the company was optimistic that its stable and profitable markets of the past would soon reappear. After Martha’s telephone call, and the subsequent receipt of a copy of the bank’s financial analysis of Golden Egg, Jim began to realize just how precarious his company’s financial position had become. As he started to reflect on what could be done to correct the problems, it suddenly dawned on him that the company was in even more trouble than the bank imagined. Jim has recently signed a firm contract for a plant expansion that would require an additional $12,750,000 of capital during the first quarter of 2013, and he had planned to obtain this money with a short-term loan from the bank to be repaid from profits expected in the last half of 2013 as a result of the expansion.
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  • Spring '18
  • Felski
  • Balance Sheet, Financial Ratio, Generally Accepted Accounting Principles, golden egg

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