Ethical Dilemma – Chapter 13 – Statement of Cash Flows Analysis

1.

Ebenezer is CEO of a successful small business. One day he stops by to see Tim Cratchit, the new branch manager at First National Bank. Ebenezer and his partner Marley would like to double the size of their loan with the bank from $500,000 to $1 million. Ebenezer explains, “Business is booming, sales and earnings are up each of the past three years, and we could certainly use the funds for further business expansion.” Tim Cratchit has a big heart, and Ebenezer has been a close friend of the family. He thinks to himself this loan decision will be easy, but he asks Ebenezer to email the past three years’ financial statements as required by bank policy.

In looking over the financial statements sent by Ebenezer, Tim becomes concerned. Sales and earnings have increased just as Ebenezer said. However, receivables, inventory, and accounts payable have grown at a much faster rate than sales. Further, he notices a steady decrease in operating cash flows over the past three years, with negative operating cash flows in each of the past two years.

Who are the stakeholders, and what is the ethical dilemma? Do you think Tim should go ahead and approve the loan?

2. 

Which one of the following two investment options would you choose that each require an initial investment of $4,000. Option A returns $1,000 at the end of each four years; option B returns $4,000 at the end of the fourth year?

Would your answer change if in year 5, option A will produce an additional cash inflow of $5,000 but that option B will never generate another dollar after the fourth year?

Will your  preference for option A or B change using only the payback method?; Why?