economic crisis due to the crash of the housing market , accounting homework help

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economic crisis due to the crash of the housing market , accounting homework help

In 2008, United States had faced an economic crisis due to the crash of the housing market also known as the “housing bubble.” Bartlett further explain, “There were in fact, many warnings dating back more than seven years-but in the euphoria of rising home prices, no one listened.” How could many of the nation key leadership ignore or deny the evidences that would later be proven as factual. In 1998, the collapse of the Glass-Stegall legislation bill, it gave investment bank and regular banks the guaranteed rights of the FDIC. This wrong move gave the investment bank the opportunity to conduct risky business such as giving loans to individuals that clearly did not meet the guideline. When a person research that company, i.e construction or mortgage, that person can see the decision of risky behaviors that company make. Many times, people rely on the information provided on a company cash flow statement to analyze the strength of that company.

The purpose of a cash flow statement is to illustrate the inflow and outflow in regards of operating, investing, and financing activities. Per Wild, Shaw, and Chiappetta (2013), “The purpose of the statement of cash flows is to report cash receipts (inflows) and cash payments (outflows) during a period.” Operating activities tracks all cash inflow and outflow transactions regards including customers for cash sales, interest from borrowers’, collections on credit sales. While employees’ salaries and wages, cost of good, merchandise, or service, lenders for interest, and taxes, and fine are the cash outflow of a company. The investing activities includes transactions of short term and long term assets. Some of the cash inflow of investing includes selling investments in securities, selling of the notes, collection on principle loans. While some of the cash outflow including making loans to others, purchase long-term product assets, productive assets, and purchase investment in securities. The financing activities focus on the transactions of long-term liabilities and equity. Some examples of cash inflows include issuing it own equity stock, issue of short and long term debt, contribution by owners, while some out includes repay of cash loans, withdrawals by owners, purchase treasury stock and to pay dividend to shareholders. All the activities work interdependent of each other, as the company transfer money between the activities.

The Artisan Shutter face a dilemma when subprime mortgages help cause the erupts of the recession in 2008. Artisan Shutter customer started making late payment, causing for the decrease of net income operating cash inflows. The funds were being so insufficient that it causes Artisan Shutter to lay off 15% of its employees. To decrease another lay off, and increase cash position of the company; the management realign its strategies, focusing on long-term viability. Despite that many companies are suffering the same effects that Artisan Shutter, changing some of the inflow and outflow of the other activities can ensure that we maintain stability. One measure that can be taken due to the decrease of cash inflow cause of customers’ failure to paid the mortgage is to increase both the investing and financing activities. To increase investing inflow, the company can sell some of their note at a discount rate, or selling off some of the long-term assets. Or when customers’ do make payments on their mortgage, apply it to the principle of the loan. In the financing activities, Artisan Shutter has offer preferred and common stocks to the employees as well as issuing notes to consumers. Lastly, Artisan Shutter has decided to limit or reduce the sold good, reducing the cash outflow. With all the changes, it should help reduce the cash outflow and improve the cash inflow.

References

Bartlett, B. (2009, 01 02). Who Saw The Housing Bubble Coming? Retrieved from Forbes :

https://www.forbes.com/2008/12/31/housing-bubble-c…

Wild, John J., Shaw, Ken W., Chiappetta, Barbara (2013). Fundamental Accounting Principles.

Irvine : McGraw-Hill .

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