Entertainment Office Group is a leading producer of film (and video) entertainment. Its 1999 and 1998 consolidated balance sheets reported the following assets (dollars in thousands):

1999 1998 Cash and short-term investments $ 37,015 $ 38,402 Accounts receivable, net 66,241 32,659 Film costs and program rights, net 180,501 130,204 Property, plant, and equipment, net 5,231 7,124 Other assets — 14,050 Current liabilities 120,507 156,419 Required

a. Evaluate Entertainment’s liquidity on the basis of the above information.

b. Assume that Entertainment’s revenues doubled between 1998 and 1999.

Reevaluate the change in accounts receivable. If Entertainment’s revenues were constant, reconsider your conclusions about accounts receivable.

c. What does the term “net”mean in each of the cases shown above?

d. Why might “Other assets”disappear in 1999?

e. What is meant by the term “Film costs and program rights”? Could this be viewed as a type of inventory? If these were stocks of films and scripts, how would the fickle nature of public opinion and personal tastes affect your evaluation of Entertainment’s assets and its liquidity? Why?

f. Entertainment’s Notes to Consolidated Financial Statements contained the following item:

Program Rights Advance payments to producers are recorded as program rights in the balance sheet and are stated at the lower of cost or estimated net realizable value.

i. How does this knowledge of how program rights are created affect your prior conclusions? Can its program rights still be viewed as inventory?

Why?

ii. If these advance payments will not be refunded by the producers, under any circumstances, how does that change your opinion concerning the program rights?

iii. What other information about the producers, the films, and the scripts would you need to have before coming to a final conclusion about the program rights?

iv. How does the relative proportion of program rights to other assets affect your conclusions? Note that Entertainment’s total assets were between

$450 million and $475 million, each year.

v. If the program rights were less than $10,000,000 each year, would that change your conclusions about Entertainment’s assets?

g. Assume that a further note in Entertainment’s annual report includes the following information: