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.
Determine the appropriate cash flow statement treatment — classification and timing, if applicable, for
the above transactions.
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