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Pearson Air Conditioning & Service > Managing a Firm's Working Capital Brothers Scott and Bob Pearson, father and son, are the owners of...

Read the attached document case #22 and answer the following questions:

Evaluate the overall performance and financial structure of Pearson Air Conditioning & Service. What numbers and ratios helped to form your evaluation?

What are the strengths and weaknesses in this firm’s management of accounts receivable and inventory? What recommendations would you make that would help Pearson in these areas?

Pearson Air Conditioning & Service > Managing a Firm's Working Capital Brothers Scott and Bob Pearson, father and son, are the owners of Pearson Air Conditioning & Service, based in Dallas, Texas. Scott serves as president, and Bob as general manager. The fi rm sells General Electric, Carrier, and York air-conditioning and heat- ing systems to both commercial and residential cus- tomers and services these and other types of systems. Although the business has operated successfully since the Pearsons purchased it in 2002, it continues to expe- rience working-capital problems. PEARSON'S FINANCIAL PERFORMANCE The firm has been profitable under the Pearsons' own- ership. In fact, profits for 2009 were the highest for any year to date. Exhibit C22-1 shows the income statement for the year ending December 31, 2009. The balance sheet as of December 31, 2009, is presented in Exhibit C22-2. Note that the firm's total debt now exceeds the owners' equity. However, $10,737 of the firm's liabilities was a long-term note payable to a stockholder. This note was issued at the time the Pearsons purchased the business, with payments going to the former owner. PEARSON'S CASH BALANCE The Pearson Air Conditioning & Service currently has a cash balance in excess of $28,000. The owners have a policy of maintaining a minimum cash balance of $15,000, which allows them to "sleep well at night." Recently, Bob has thought that they would still be able to "breathe comfortably" as long as they kept a mini- mum balance of $10,000. PEARSON'S ACCOUNTS RECEIVABLE The accounts receivable at the end of 2009 were $56,753, but at times during the year, receivables could be twice this amount. These accounts receivable were not aged, so the firm had no specific knowledge of the number of overdue accounts. However, the firm had never experi- enced any significant loss from bad debts. The accounts receivable were thought, therefore, to be good accounts of a relatively recent nature. Customers were given 30 days from the date of the invoice to pay the net amount. No cash discounts were offered. If payment was not received during the first 30 days, a second statement was mailed to the customer and monthly carrying charges of 1/10 of 1 percent were added. On small residential jobs, the fi rm tried to col- lect from customers when the work was completed. When a service representative fi nished repairing an air-conditioning system, for example, he or she pre- sented a bill to the customer and attempted to obtain payment at that time. However, this was not always possible. On major items, such as unit changeouts-- which often ran as high as $2,500--billing was almost always necessary. On new construction projects, the firm sometimes received partial payments prior to completion, which helped to minimize the amount tied up in receivables.
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QUESTION:
Evaluate the overall performance and financial structure of Pearson Air Conditioning &
Service.
SOLUTION:
The overall performance of the company can be evaluated from different...

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