John Young is a new assistant controller at Richmond Electronics, a large regional consumer electronics chain. Before John’s recruitment, he was aware of Richmond’s long trend of moderate profitability. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The issue he is facing as he reviews the reports is the decline and erratic trend in cash flows from operations. John sketched the following comparison ($ in millions): John sketched the following comparison ($ in millions): 2014 2013 2012 2011 Income from operations $ 140.0 $ 132.0 $ 127.5 $ 127.0 Net income 38.5 35.0 34.5 29.5 Cash flow from operations 1.6 19.0 14.0 15.5 His sketch shows increasing profits but an ominous trend in cash flow, which is consistently lower than net income. Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related: Richmond loosened its credit policy. In other words, Richmond relaxed its credit terms and lengthened payment periods. Accounts receivable balances increased dramatically. Several of the company’s compensation arrangements, including that of the controller and the company president, were based on reported net income. What is so ominous about the combination of events John sees? If you were John, what course of action will you take? 2014 2013 2012 2011 Income from operations $ 140.0 $ 132.0 $ 127.5 $ 127.0 Net income 38.5 35.0 34.5 29.5 Cash flow from operations 1.6 19.0 14.0 15.5 Solution He is clearly sees that the company having problems with its cash flow management as it accounts receivable increased dramtically mwnaing the cash flow from operations will come down but this will not effect net income. I will reduce the credit policy period of company and i will change it based on business we are getting from each client and profit marging generated from each.

1. John Young is a new assistant controller at Richmond Electronics, a large regional consumer
electronics chain. Before John’s recruitment, he was aware of Richmond’s long trend of
moderate profitability. The reports on his desk confirm the slight, but steady, improvements in
net income in recent years. The issue he is facing as he reviews the reports is the decline and
erratic trend in cash flows from operations. John sketched the following comparison ($ in
millions):
John sketched the following comparison ($ in millions):
2014
2013
2012
2011
Income from operations
$ 140.0
$ 132.0
$ 127.5
$ 127.0
Net income
38.5
35.0
34.5
29.5
Cash flow from operations
1.6
19.0
14.0
15.5
His sketch shows increasing profits but an ominous trend in cash flow, which is consistently
lower than net income. Upon closer review, Ben noticed three events in the last two years that,
unfortunately, seemed related: Richmond loosened its credit policy. In other words, Richmond
relaxed its credit terms and lengthened payment periods. Accounts receivable balances increased
dramatically. Several of the company’s compensation arrangements, including that of the
controller and the company president, were based on reported net income. What is so ominous
about the combination of events John sees? If you were John, what course of action will you
take?
2014

2. 2013
2012
2011
Income from operations
$ 140.0
$ 132.0
$ 127.5
$ 127.0
Net income
38.5
35.0
34.5
29.5
Cash flow from operations
1.6
19.0
14.0
15.5
Solution
He is clearly sees that the company having problems with its cash flow management as it
accounts receivable increased dramtically mwnaing the cash flow from operations will come
down but this will not effect net income.
I will reduce the credit policy period of company and i will change it based on business we are
getting from each client and profit marging generated from each