A) What are the probable effects of the new credit policies on Shilstones liquidity position?

B) Refer to the IMAs Statement of Ethical Professional Practice.Evaluate Jennifer Adamss decision not to fully comply with the changes in credit and collection policies implemented by Amy Cooper. Refer to specific standards when making your evaluation.

C) How would you recommend that Jennifer Adams handle her disagreement with Coopers policies?

D) Assume it is December 30, and Adams is doing a preliminary review of the companys year-end balance sheet. It appears that the current ratio will be between 2.0 and 2.1, which would likely violate the companys debt covenants. Adams knows that one of her large customers, who happens to be a category 8 risk and is teetering on the verge of bankruptcy, is trying to get enough cash together to place a signifi cant order with Shilstone. If she relaxes the new credit policies and allows the customer to purchase on credit, the resulting account receivable will push the current ratio over the required 2.1 level, preventing Shilstone from defaulting on its bank loan. Should Adams approve the sale? Why or why not? Refer to the IMAs Statement of Ethical Professional Practice in making your argument.

Shilstone Supply, Inc. manufactures a variety of pumps and valves that are distributed through several thousand plumbing supply houses, as well as 100 manufacturer's representatives. Due to less-than favorable business conditions in the industry over the last several years, Shilstone's cash flow position has deteriorated. Over the past four years, the company's Accounts Receivable balance grew from 5% to 9% of assets, and its current ratio declined from 2.8 to 2.0. Over the same period, bad debts grew from 1.5% to 3% of sales. Debt covenants with Shilstone's bank require that the current ratio be above 2.1 at year-end. Shilstone's president, Bill Rowe, recognizes the need to take action to improve the company's liquidity position. He has hired Amy Cooper, an experienced cash manager, to assess the company's situation and make recommendations for improvement. Cooper has met with Jennifer Adams, Shilstone's controller, and has gathered the following facts: Shilstone's products have an average contribution margin of 30%. Shilstone is operating at slightly less than full capacity. Shilstone's current credit terms are 2/12, net 45, which is in line with industry standards. Late notices are sent out monthly on all past due accounts, with a follow-up telephone call to delinquent accounts in excess of $8,000. Delinquent accounts are sent to a collection agency when they become 12 months overdue. Based on her experience and her analysis of Shilstone's data, Cooper has classified Shilstone's customers into eight categories based on the likelihood of their accounts becoming uncollectible. She has implemented the following changes in Shilstone's credit policies to improve cash flow. Cooper believes these changes will reduce bad debts to between 1% and 1.5% of sales. New credit terms of 2/10, net 30 will be applied to all accounts in risk categories 1 through 5. Cooper expects these customers to accept this change without issue. The overall effect of the change should be improved accounts receivable turnover and reduced bad debts. Customers in risk categories 6 and 7 will be subject to stricter credit terms, such as cash on delivery. Sales to customers in risk category 8 will have to be paid in advance. While Cooper acknowledges that Shilstone will lose some sales to customers in these categories, she believes the lost sales will be concentrated in the high-risk category. Collection efforts will be increased to ensure better compliance with the new credit terms. Follow-up telephone calls will be made to all delinquent accounts in excess of $2,000. Accounts that are nine months overdue will be turned over to a collection agency. Jennifer Adams is responsible for extending credit to customers and for establishing the guidelines under which the manufacturer's representatives operate. She has often relaxed the company's credit terms to meet the needs of various customers, and over time she has developed a close relationship with many of the larger customers. After reviewing Amy Cooper's suggested changes, Adams has some concerns about the effect of the new policies on some of those customers, and by extension, on Shilstone's sales. She has performed her own customer risk analysis and concluded that some of Cooper's risk classifications are inappropriate. In her view, some of the larger customers are better business risks than indicated in Cooper's analysis. Adams has concluded that following the new policies would reduce sales by more than Cooper estimates, leading to idle manufacturing capacity. She has decided not to share her findings with Rowe or Cooper. Instead, she will continue to use her discretion in relaxing the company's credit policies, particularly as they affect larger customers. IMA's Statement of Ethical Professional Practice: IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE Members of IMA shall behave ethically. A commitment to ethical professional practice includes: overarching principles that express our values, and standards that guide our conduct. PRINCIPLES IMA's overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them. STANDARDS A member's failure to comply with the following standards may result in disciplinary action. I. COMPETENCE eg 1. COMPETENCE Each member has a responsibility to: 1. Maintain an appropriate level of professional expertise by continually developing knowl- edge and skills. 2. Perform professional duties in accordance with relevant laws, regulations, and technical standards. 3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. II. CONFIDENTIALITY Each member has a responsibility to: 1. Keep information confidential except when disclosure is authorized or legally required. 2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance. 3. Refrain from using confidential information for unethical or illegal advantage. III. INTEGRITY Each member has a responsibility to: 1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in or supporting any activity that might discredit the profession. IV. CREDIBILITY Each member has a responsibility to: 1. Communicate information fairly and objectively. 2. Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. controls in conformance with organization policy and/or applicable law. RESOLUTION OF ETHICAL CONFLICT In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your organization's established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action: 1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the imme- diate superior should be initiated only with your superior's knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. 2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action. 3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict