Homework answers / question archive / You are on the accounting staff of Diamond Nature Company

You are on the accounting staff of Diamond Nature Company

Business

Share With

---

You are on the accounting staff of Diamond Nature Company.  Diamond Nature has a $100 million loan with Trinity National Bank.  One of the covenants associated with the loan is that Diamond Nature must maintain a current ratio greater than 1.5. 

As of January 20, 2019, preliminary financial statement numbers for the year ended December 31, 2018 have been compiled.  It looks like Diamond Nature will violate the current ratio loan covenant.  Violation could be very costly in two ways.   First, Trinity National Bank has historically raised the interest rate one-half of a point on loans with covenant violations.  Second, a violation will increase the perceived riskiness of Diamond Nature and make future borrowing more costly.

The 2018 financial statement numbers are just preliminary, and the senior accountant staff of Diamond Nature has discussed the following two options to avoid violation:

1. Reclassify "long term investment property" as "short-term property held for sale."  Doing this would require a statement from management that the intention to sell the property within one year.  Actually, Diamond Nature intends to hold the property for several more years, and the property classification would be changed back to long-term next year when the threat of covenant violation has hopefully disappeared.

2. Reclassify certain short-term loans as long-term on the basis that Diamond Nature will refinance the loans.  Technically, this is true.  However, Diamond Nature has no formal refinancing commitment and will not have one until some time in June.

You have been chosen to present the findings of the accounting staff to the board of directors.  What points will you emphasize in your presentation (be sure to include technical accounting literature references)?

Assignment # 2

Walmart

1) Compute a current ratio for your company for the recent period.  How does this current ratio compare with the prior year's current ratio?

2) Compute the asset turnover for your company for the recent period.  Was the company more or less efficient in the recent period as compared to the prior period?

3) What method of inventory valuation does your company use?

4) What method of depreciation does your company use?

5) What material commitments and contingencies does your company report in the notes to its most recent period financial statements?