Please see attachment and complete cases 4-55 & 5-59.
Both cases involve the need to understand how to read the financial statements, and to be able to assess the effect of changes in the marketplace. The 378-word solution explains how to figure out the changes, and then how to explain it to the principals. Included are possible remedies for the problems.
In a stable business and in times of little inflation, Max Stevenson and others with similar businesses could maintain the status quo with regard to income and dividend withdrawals. Dividends payments tend to be more characteristic of value (mature) companies as opposed to growth companies. Growth companies usually plow their earnings back in to support and pay for growth. Max undoubtedly was a value business until the replacement cost of inventory started to bit him.
Even if the quantity of inventory remained exactly the same from year to year, the ...
Both cases involve understanding how to read and interpret financial statements.