FIN – Cash Is King Inc. Case

Cash Is King Inc Cash Is King Inc., a calendar year-end SEC registrant, is a leading automotive retail and service chain. The company operates exclusively in the automotive aftermarket industry and is engaged principally in the retail sale of automotive parts, tires, and accessories, automotive repairs and maintenance, and the installation of parts. The Company’s liquidity and capital requirements are primarily a function of its working capital needs, capital expenditures, and debt service requirements. The Company has the following transactions for the current year: 1. Acquisition of Property, Plant, and Equipment on Account On December 15th, the Company incurred $20 million of capital expenditures related to the acquisition of manufacturing equipment and machinery. The terms of the invoice are 2%/15, net 30. The amounts were unpaid as of year-end (i.e., included in the accounts payable balance). The Company intends to pay the invoice in early January, in accordance with the terms of the invoice. 2. Insurance Settlement Proceeds Cash Is King Inc. has a warehouse and sales office in the Gulf Coast Region. The damage caused by Hurricane William (Hurricane), a Category 5 hurricane, has rendered the warehouse inoperable and has also forced the company to rent temporary office space in Houston to accommodate its sales force. The Company reached a settlement with its insurance carrier related to the damage from the hurricane and received proceeds of $15 million from its insurance carrier in connection with its claim for reimbursement. The Company plans to use the insurance proceeds to fund its defined-benefit pension plan, rather than to rebuild the destroyed facility. 3. Sale of Accounts Receivable The Company sells undivided interests in designated pools of qualified accounts receivable to a securitization vehicle. The Company utilizes securitization as a ?financing technique? (e.g., to reduce more expensive bank debt – the interest rates the company obtains on notes issued by the qualifying special purpose entity are lower than the company could get on its own bank debt). The Company services, administers and collects the receivables on behalf of the purchaser. The agreement includes certain covenants and provides for various events of termination. The agreement also requires that proceeds from securitization be used to pay down Company debt. During the current year, $11 million of receivables generated from sales of the Company’s inventory were sold under the agreement, and, therefore, are not reflected in the accounts receivable balance in the Company’s balance sheet. Required: Determine the appropriate cash flow statement treatment — classification and timing, if applicable, for the above transactions.

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