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Finance & Accounting
Pages 3 (753 words)
Guillermo Furniture Store is a company that was enjoying great success due to favorable market conditions. The company had cheap labor available, a great supplier of timber, and a quality product that the company could sell at premium prices. During those times the financial statements of the company including its income statement showed great profitability…
Guillermo faced new competitors that utilized innovation in manufacturing processes to create an automated furniture manufacturing operation that required minimum labor. The competition was able to offer products of good quality with great precision at rock bottom prices. When the new competition came into the market Guillermo Furniture Store faced a variety of problems. During the same timeframe other factors affected the Sonora region as more people moved into the area due to social and economical progress; as a consequence the costs of labor climbed. Guillermo Furniture Store had an old school manufacturing system that was highly dependent on manual labor. When labor prices increased the cost structure of Guillermo Furniture Store went up a lot. As the company faced higher costs the revenues of the firm decreased simultaneously because the competition took a lot market share away from Guillermo Furniture Store. The company suddenly was faced with financial distress and liquidity problems. When a firm faces liquidity problems they lose their ability to pay off its obligations. A ratio that measures a company’s ability to pay off its short term debt is the current ratio (Accountingformanagement, 2011). Guillermo realized that the firm needed to make changes. ...
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