Cambridge Construction Company follows the percentage-of-completion method for reporting long-term contract revenues. The percentage of completion is

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Cambridge Construction Company follows the percentage-of-completion method for reporting long-term contract revenues. The percentage of completion is based on the cost of materials shipped to the project site as a percentage of total expected material costs. Cambridge’s major debt agreement includes restrictions on net worth, interest coverage, and minimum working capital requirements. A leading analyst claims that

“the company is buying its way out of these covenants by spending cash and buying materials, even when they are not needed.” Explain how this may be possible.

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Business Analysis And Valuation Using Financial Statements Text And Cases

ISBN: 9780324015652

2nd Edition

Authors: Krishna G. Palepu, Paul M. Healy, Victor Lewis Bernard, W.Gordon Filby

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