Spring Valley Essay

Words: 1145
Pages: 5


Upon returning from his annual two-week vacation in early July of 2002, the treasurer of the Spring Valley Forest Products Corporation, a Mr. Fred Firr, found the firm's audited balance sheet as of June 30 on his desk. Close scrutiny of the company's financial condition as reported in this document suggested to Mr. Firr that the cash flow picture for the enterprise was deteriorating. In times gone by, the firm had been able to maintain sizeable cash balances in its bank of account, Tippecanoe Trust Company, during the major portion of the fiscal year, and had found only modest seasonal borrowings necessary. Recently, however, a lengthening of credit terms to customers necessitated by intense
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The associated cash payments, like those for labor costs, typically occurred with no appreciable time delay. Depreciation charges amounted to $3,000 per month, as did miscellaneous cash expenses. On the horizon, however, was a special outlay for pollution control equipment that would be necessitated by new regulations soon to be imposed by the Wabash Valley Watershed Authority on emissions from sawmill operations. These would call for the installation of a woodchip recycling facility costing $80,000 in mid-November. Terms from the supplier were net, 30 days. Depreciation on the equipment would come to approximately $2,000 per month, starting with November. In December, the company planned to retire from its books a fully depreciated de-barking crib which had originally cost $30,000, and which was no longer used in the firm's operations.

As matter of policy, Mr. Firr felt that SPRIVORPCO should maintain a minimum cash balance of $50,000 in its account for normal transactions needs. His brother, Douglas, who was the loan officer at Tippecanoe Trust Company (TIPTCO), indicated that this sum would satisfy the bank's desires for compensating balances. A cash dividend of $20,000 to common stockholders was contemplated for December. Mr. Firr hoped to be able to make the payment, since