3/29/16
Advance Corporate Finance




What is the problem faced by SRI?

SRI Office Products Inc. is a supplier of national stationery products with a nation wide range of distributors. In 1995 SRI faced an issue with one of their main customers having a 14 month old accounts receivable account. Macdonald Stationery and Office Supplies Ltd as of September 1995 owed SRI $2.4million dollars and was heavily impacting their financial statements. These losses wiped out retained earnings and lowered equity 2% lower than their assets. SRI is facing problems such as their debt to equity ratio was 97% which led to banks refusing to extend its line of credit. Management is currently discussing a way to receive their money but having trouble deciding what way to execute a plan for McDonald\'s to pay them back



















2. Evaluate financial statements of Macdonald and comments on its financial health.
Balance Sheet
Financial statements of Macdonald show us that the company is in very bad condition. Firstly, they have very low amount of cash on hand . In my opinion this low amount of cash on hand is really bad for the business. Low amount of cash on hand means they can\'t meet their future obligations so they have increase their cash availability to survive. Secondly, they have very high amount of accounts receivable on their balance sheet. In my opinion this is not a good news for the Macdonald Company. High amount of accounts receivable means they are not turning the revenue into cash soon as possible. They should decrease their accounts receivable much as possible to stabilize the business. Thirdly the business also has a very high amount of accounts payable on the balance sheet. In my opinion the reason behind the high accounts payable is the low cash on hand. Basically they don\'t have enough cash on hand to make the payments. The business has to increase the cash on hand to pay the accounts payable off. The Fourth reason for the Macdonald\'s condition is that they very high inventory amount on the balance sheet. In my opinion this high amount of inventory sends a warning alarm for the business. The reason behind the high inventory is that they are ordering more inventory while they have the old ones stocked up basically they should sell the old ones and then order it. The Fifth reason for the business\'s condition is the high amount of bank loans it has on the balance sheet. In my opinion this high amount of bank loans will send the creditors a message that they can\'t pay their loans. The reason behind the high amount of bank loans is that the business is borrowing more money to pay the accounts payable and they can\'t always do this they have stop. The last reason for the company\'s condition from the balance sheet is the negative retained earnings. In my opinion the company has a negative retained earnings because of high expenses, low sales, and dividends payout. The company needs to increase sales, lower the expenses, and shouldn\'t pay out dividends for now.




Income Statement
The first reason for the company\'s condition from the Income Statement is the low sales that they are generating compare to expenses and remember they have high inventory. In my opinion low sales are bad for a company and they have find a way to sell all the inventory they have stocked up. Basically they have to turn these inventory into cash and increase the sales to survive. The second reason for the company\'s situation is the high administration expense they have occurred. The business has occurred high administration expense because they have brought a computer system that is not effective. In my opinion they shouldn\'t brought this system but they did so they use this system to their business advantage. The third reason for the company\'s situation is the high interest expense that they have in the Income Statement. Remember they have a lot amount in bank loan account on the balance sheet. In my opinion they have to communicate with bank and come up with new structure where they are charged low interest. The forth reason for the company\'s condition is the high non - operating expense that has been occurred. They paid a lot