Wt Grant Company

Table of Contents

1 Major causes of grant’s financial problems 2

1.1 Financing current assets with current liabilities 2

1.2 Permitting consumers a long credit period with minimal monthly payment 2

1.3 Business expansion without proper inventory management system 3

1.4 Financing expansion with too much debt 3

1.5 High compensation for its employees 4

1.6 Financing store space with leasing arrangements 4

1.7 Other causes 5

1.7.1 Recording finance charges on credit sales as incomes in the year of the sale 5

1.7.2 Accounting wholly owned finance subsidiary using the equity method 5

1.7.3 Generating cash from financing tools instead of its operations and investments 5

1.8 Conclusion 5

2 Period to doubt the ability of Grant to continue as a viable going concern 5

2.1 Short-term liquidity risk 5

2.2 Long-term liquidity risk 6

2.3 Profitability analysis 7

2.4 Conclusion 7

Major causes of grant’s financial problems

Financing current assets with current liabilities

One of the major causes of Grant’s financial problem was financing its receivables and inventory with current liabilities. As seen in exhibit 3.39, the rise in short-term debt ($99230000 to $118125000) and accounts payable ($79673000 to $102080000) from 1968 to 1969 has significantly increase the current liabilities. Meanwhile, the rise in receivables and inventories from $27250000 to $312776000 and from $183722000 to $208623000 respectively has caused current assets to increase. The outcome is a drop in current ratio from 2.06 in 1968 to 1.93 in 1969 (exhibit 3.45). This implies Grant’s ability to repay its short-term obligations has decreased. Furthermore, given that customers are given 1.5 years to repay their debt and there was a lack of a proper inventory tracking system, it would take Grant longer to liquidate its current assets to meet its short-term obligations should the need arise. This increase in liquidity risk is also reflected in the...