Question 1. Cambridge Construction Company follows the percentage-of-completion method for reporting long-term contract revenues. The percentage of completion is based on the cost of materials shipped to the project site as a percentage of total expected materials costs. Cambridge's major debt agreement includes restrictions on net worth, interest coverage, and minimum working capital requirements. A leading analyst claims that "the company is buying its way out of these covenants by spending cash and buying materials, even when they are not needed." Explain how this may be possible.
Question 2. Can Cambridge improve its Z score by behaving as the analyst claims in Question 1? Is this change consistent with economic reality?