Scenario:

Your company has designed a new accounts payable system that utilizes a patsy code field in its vendor master file. This code is never disclosed to vendors and is used to indicate their tolerance for your companys practice of:

• taking unearned discounts (e.g., discounts taken after discount period)
• returning ordered merchandise without justification
• short-paying invoices (not paying full amount)
• paying invoices chronically late.

Patsy codes values range between 1 and 5 represent the relative sensitivity of a vendor to such practices. A patsy code of 1 indicates that the expected cost of such practices would likely exceed any benefit. For example, a vendors products are either critical to your companys mission or that the above behaviors would result in immediate negative consequences (halted shipments, revoked credit privileges). Alternatively, a patsy code of 5 indicates that the vendor is highly insensitive to such practices (e.g., your company can get away with a lot of abuse).

The patsy code is used solely to determine the extent to which your company will engage in the above-described behaviors with a particular vendor. The new accounts payable system contains processing rules that utilize this code to determine whether to pay an invoice as agreed, or alternatively, when and how much to pay. Your company has ample cash reserves and easily has the ability to pay its obligations as agreed. Its only motivation for implementing this patsy code is to enhance its bottom line.

Question: Assume that you have a critical cash shortfall over the next four months. Due to a past violation of a loan covenant, it is highly unlikely that sufficient working capital can be borrowed or obtained from other sources to deal with this cash shortfall. The company is assured of sufficient cash flow after the four-month period from existing long-term contracts. However, without additional cash, the company will become insolvent and fail in two months. How does this change your answer to questions 1 and 2?

Answer, Please.