Assignment Paper

Case #2 – Receivables, Inventories etc.
You are a relatively young senior-level executive at Spartan Aviation, Inc. – a publicly traded company located in Seattle Washington. Your title is Chief Strategist and as such, you are part of a high-level inner circle of C-Suite executives that report directly to the CEO Shaun Coulson.
Spartan Aviation manufacturer’s high-quality passenger seating exclusively for Boeing with a product line that includes the following two items:
1. The “Aviator Comfort” seat designed and manufactured solely for the Boeing 737 Max that includes a very comfortable seating configuration along with state-of-the-art entertainment on the back of each headrest.
2. The “Aviator Long-Haul” seat designed and manufactured solely for the Boeing 777 that includes a very comfortable seating configuration and state-of-the-art entertainment plus reclining foot rest features often found on long-haul aircraft such as the 777.
Spartan Aviation’s balance sheet as of February 29, 2020 is summarized as follows:
Cash $ 50,000,000 Accounts Payable $ 25,000,000
Accounts receivable 300,000,000 Bonds payable 750,000,000
Notes receivable 100,000,000 Long-term debt 250,000,000
Inventory (FIFO) 250,000,000 Total liabilities 1,025,000,000
Property plant equipment (BV) 1,250,000,000
Other assets 100,000,000 Stockholders equity 1,025,000,000
Total assets $ 2,050,000,000 Total liabilities & equity $ 2,050,000,000
Other explanatory notes as respects the year-end balance sheet include the following:
1. Accounts receivable are entirely from sales to Boeing in the last 45 days.
2. Notes receivable are once again, entirely from sales to Boeing. However, this amount was originally derived from accounts receivable for seating shipments to Boeing for the 737 Max in early 2019. When Boeing hit a cash flow crunch in the prior year because of the 737 Max issues, the account receivables were converted to a note receivable with interest at 9%. Currently, the note is completely up-to-date as respects interest payments and the full principal amount will be due January 1, 2021.
3. Inventory includes $125 million of 737 Max seats that have been sitting in the warehouse for over a year and $125 million of recently built 777 seats which again, will be waiting in the warehouse until Boeing commences production again.
4. Bonds payable were issued in 2016 primarily to finance the buildout of the manufacturing plant that builds the 737 Max seating. The bonds carry a very attractive interest rate of 3.1% but require that the company maintains a debt to equity ratio of no more than 1 to 1 or else the bonds become immediately due and payable.
Shaun has called you into his office because he wants to talk about how this whole coronavirus issue has him extremely worried about the aviation industry and specifically, what the fallout might be to Spartan Aviation if the unthinkable were to happen (i.e. Boeing were to go bankrupt).
Shaun is very aware of the receivables issue Spartan Aviation has with Boeing, however, he is not from the financial side of the business and as such, really doesn’t understand asset impairments or the true economic effect to Spartan Aviation of Boeing possibly going bankrupt. On April 10, Shaun will be addressing the Board of Directors to discuss the financial exposure Spartan Aviation has as a result of this “single customer” dependence on Boeing. Specifically, he will address what the effect will be on their April 30 fiscal year-end financial statements should Boeing go into bankruptcy and that economic reality is reflected in their GAAP financial statements.
Shaun has asked that you prepare for him a one-page business memo specifically quantifying and addressing the following questions:
1) What would the effect be on Spartan Aviation’s i) income statement, and ii) equity position if indeed Boeing went bankrupt and Spartan Aviation received absolutely nothing from Boeing in payment of the unsecured accounts receivables and unsecured note receivable the company has from Boeing? Also, please briefly describe in layman’s terms the GAAP concept requiring the recognition of this economic reality?
2) What would the effect be on Spartan Aviation’s i) income statement, and ii) equity position if Boeing went bankrupt and Spartan Aviation was unable to sell or realize any economic value at all from the inventories on hand at the end of February? Also, please briefly describe in layman’s terms the GAAP concept requiring the recognition of this economic reality?
3) Are there other financial issues that Shaun needs to be aware of other than those associated with receivables and inventories? If there are, Shaun does not need you to quantify any financial statement effect, however, he would appreciate hearing your thoughts on what those might be for later consideration.
Again, Shaun wants you to prepare a memo to him – for his use – as he prepares for the board meeting and needs your input on explaining and articulating the relevant GAAP and then quantifying the effect on the income statement and equity position of Spartan Aviation.

1.Your job is management support, not management – Please understand that in these cases, you have not been asked to comment on the current economy, on the decision-making process, or on the direction the company might take. Additionally, it’s not necessary to restate facts in your memo other than those facts that are directly relevant to the GAAP measurement necessary in the circumstances. Senior management will or has already made a decision – your role is to quantify the economic reality that will be reflected in the financial statements as a result of management’s decisions by applying the appropriate GAAP. Management wants to understand the accounting before making their decision or on some occasions, after they’ve made the decision.
2. Purpose – Each business memo should be formatted with the traditional To:, From:, Date:, and Subject. In addition, it should generally start with an initial short paragraph that articulates the reason or purpose the memo is being written which in our case is simply to “analyze how GAAP measures and reflects the economic reality of the situation you summarize briefly as described in the case”.
3. Format – Effective business memos generally contain: 1) an articulation of the relevant facts, 2) an articulation and summarization of the appropriate GAAP, and then 3) a macro quantification of the GAAP effect on the financial statements.
4. Summary section – Effective business memos also generally contain a summary sentence or summary section that visually depicts, in tabular or chart form, the financial statement impact of each issue mentioned in the memo and a “total effect on the financial statements” if there are multiple issues..
5. Professionalism – Effective business memos should be succinct, to the point, and include appropriate grammar, sentence structure, etc. Additionally, when describing dollar amounts using numeric quantification, the memos should incorporate the use of the dollar sign “$” where applicable.