hello chegg. i need the asnwer of question number 2 please

Bob and Scott Pearson, father and son, are the owners thought that they would still be able to breathe comfort- of Pearson Air Conditioning & Service, based in Dallas, ably" as long as they kept a minimum balance of $10,000. Texas. Bob serves as president, and Scott as general man- ager. The firm sells General Electric, Carrier, and York air-conditioning and heating systems to both commercial Pearson's Accounts Receivable and residential customers and services these and other The accounts receivable at the end of 2011 were $56,753, types of systems. Although the business has operated suc- but at times during the year, receivables could be twice this cessfully since the Pearsons purchased it in 2002, it contin amount. These accounts receivable were not aged, so the ues to experience working capital problems. firm had no specific knowledge of the number of overdue accounts. However, the firm had never experienced any Pearson's Financial Performance significant loss from bad debts. The accounts receivable were thought, therefore, to be good accounts of a relatively The firm has been profitable under the Pearsons' owner. recent nature. ship. In fact, profits for 2011 were the highest for any year Customers were given 30 days from the date of the to date. Exhibit C22.1 shows the income statement for the invoice to pay the net amount. No cash discounts were year ending December 31, 2011. offered. If payment was not received during the first 30 days, The balance sheet as of December 31, 2011, is presented a second statement was mailed to the customer and monthly in Exhibit C22.2. Note that the firm's total debt now carrying charges of 1/10 of 1 percent were added. exceeds the owners' equity. However, $10,737 of the firm's On small residential jobs, the firm tried to collect from liabilities was a long-term note payable to a stockholder.cstomers when the work was completed. When a service This note was issued at the time the Pearsons purchased representative finished repairing an air-conditioning sys- the business, with payments going to the former owner. tem, for example, he or she presented a bill to the customer and attempted to obtain payment at that time. However, this was not always possible. On major items, such as unit Pearson's Cash Balance changeouts which often ran as high as $2,500-billing Pearson Air Conditioning & Service currently has a cash was almost always necessary. balance in excess of $28,000. The owners have a policy of On new construction projects, the firm sometimes maintaining a minimum cash balance of $15,000, which received partial payments prior to completion, which allows them to "sleep well at night." Recently, Bob has helped to minimize the amount tied up in receivables. C22.1 Pearson Air Conditioning & Service Income Statement for the Year Ending December 31, 2011 EXHIBIT Sales revenue Cost of goods sold Gloss profit Selling general and administrative expenses including interest expensel Profits before ta Income tax Net profits 5727,679 466.562 5261,117 189031 572,056 17:54 554540 Way 2011 EXHI Cat 52789 56.753 9,562 4415 5179.519 24 16.00 5 236 Accounts receivable Inventory Prepaid pes Totalment Loans to stockholders Altru, and equipment to less code of 536,141 Other sets Total Debt (Liabilities and Equity Gedebt Currenmates of longtep Accounts payable Acid payrolles Income tax payable Other accrued experts Torrent dett Long-terminale Ruta calderet Total debt and equity 5 M43 I 2,173 13613 001 $4900 51231 1625 $262.036 Current and long-term portion of the Current 510 Long Term $ 1,367 Total S21 584 10 payabled by biddin monthly installments of $200 including interest . 10 peale, secured by the in months of 10 including interest one piecured by try and met doen monthly installments of 567 ceding interest pe totholder 125 payable to hankidays 192 12 5519 10.737 D 17100 5. 103 17.00 SS123 Pearson's Inventory They believed that there might be some si fory, but in the absence of a standard, this was basically Inventory accounted for a substantial portion of the form an opinion. When pressed to estimate the amount that working capital It consisted of the various heating and might be eliminated by careful control, Scott pered air-conditioning units parts and supplies used in the at 15 percent business The firm used annual physical inventory that can The Peanus had no guidelines or industry stas cided with the end of its fiscal year. Since the inventory dards to use in evaluating their overall inventory levels level was known for only one time in the year, the income 691 statement could be prepared only on an annual basis cash discount, the firm obtained the use of the money for There was no way of knowing how much of the inventory days. Although the Pearsons could stretch the payment had been used at other points and, thus, no way to calcu dates to 45 or even days before being 'pol on COD late profits. As a result, the Pearsons lacked quarterly or monthly income statements to assist them in managing days because suppliers would begin calling and applying they found it unpleasant to delay payment more than 45 the business Scott and Bob had been considering changing from a pressure for payment physical inventory to a perpetual inventory system, which York) used different terms of payment. Some fare prod. Their major suppliers (Carrier, General Electric, and would enable them to know the inventory levels of all items acts could be obtained from Carrier on an arrangement at all times. An inventory total could easily be computed town as "floor planning meaning that the manufac for use in preparing statements. Shifting to a perpetual ture would ship the products without requiring immedi inventory system would require that they purchase new computer software. However, the cost of such a system ate payment. The Pearsons made payment only when the product was sold. I still unsoldater 90 days, the product would not constitute a major barrier. A greater expense had to be returned paid for. It was shipped back on would be involved in the maintenance of the system company truckso no expense was incurred in returning entering all incoming materials and all withdrawal. The unsold items) On items that were of floor planned but Pearsons estimated that this task would require the work were purchased from Carrier. Personpaid the set amount of one person on a less than full-time possibly hullime by the 10th of the other was charged 15 percent interest basis en bate payments Shipments from General Electric required payment Pearson's Note Payable at the bank soon after receipt of the products. If cash was not available at the time, further borrowing from the honk to the Bank became necessary. Purchases from York required net pay ment without discount within 30 days. However, if pay Bank borrowing was the most costly form of credit The firm paid the going rate, slightly above prime and owed ment was not made within 30 days interest at percent per was added $17.600 on a 90-day renewable note. Usually, some of the principal was paid when the note was renewed. The total borrowing could probably be increased if necessary. There Can Good Profits Become Better? was no obvious pressure from the bank to reduce crow- ing to zero. The amount borrowed during the year typ Although Pearson Air Conditioning Service had earned cally ranged from $10,000 to $35.000 apood profit in 2011 the Pancos wondered whether they The Pearsons had never explored the limits the bank were realizing the test post profit. The slowdown in miglt impose o borrowing, and there was no clearly spee- the construction industry during 2011 was currently affect ified line of credit. When additional funds were required, ing their business. They wanted to be sure they were moet Scott simply dropped by the bank, spoke with a bank of ing the challenging times as prudently as posible cer (who also happened to be a friend, and signed a note for the appropriate amount Questions 1. Evaluate the overall performance and financial struc- Pearson's Accounts Payable ture of Pearson Air Conditioning & Service A significant amount of Pearson's working capital came 2. What are the strengths and weaknesses in this firms from its trade accounts payable. Although accounts pay management of accounts receivable and inventory ahle at the end of 2011 were $38,585, payables varied over 3 Should the firm reduce or expand the amount of it time and might be double this amount at another point hank borrowing in the year. Pearson obtained from various dealers such 4. Evaluate Pearson's management of accounts payable supplies as expansion valves, copper tubing, sheet metal, 3. Calculate Pearson's cash conversion period. Interpeet electrical wire, and electrical conduit. Some suppliers your computation offered a discount for cash (2/10, met 30). but Bob felt that establishing credit was more important than saving 6. How could Pearson Air Conditioning & Service Run the improve its working capital situation