Question
Assume that you are the CEO of a small publicly traded company. The operating performance of your company has fallen below market expectations, which is
Assume that you are the CEO of a small publicly traded company. The operating performance of your company has fallen below market expectations, which is reflected in a depressed stock price. At your direction, your CFO provides you with the following recommendations that are designed to increase your company's return on net operating assets (RNOA) and your operating cash flows, both of which will, presumably, result in improved financial performance and an increased stock price
1. To improved net cash flows from operating activities, the CFO recommendsthat your company reduce inventories (raw material, work-in-process,and finished goods) and receivables (through selective credit granting and increased emphasis on collection of past-due accounts).
2. The CFO recommends that your company sell and lease back its office building. The lease will be structure so as to be classified as an operating lease under GAAP. The assets will, therefore, not be iincluded in the computation of the net ooperating assets (NOA), thus increasing RNOA.
Evaluate each of the CFO recommendations. In your evaluation consider whether the recommendation will positively impact the operating pperformance of your company or whether it is cosmetic in nature.
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