Fielding Questions on Corporate Governance

In today's installment of my ongoing Friday Q&A series, I'll address your questions on accounting and corporate governance. Next week, by the way, my Q&A will have a different theme: Ask me any off-the-wall question, no matter how outrageous, and I'll try to answer it. Be sure to send yours in.

Question: I'm a subscriber and avid reader of The Turnaround Report. Boeing (BA - commentary - Cramer's Take) always has a current ratio of less than 1 [meaning that current assets are less than current liabilities] . Doesn't this bother you?

-- S.P.

Answer: It's not that simple. It depends on the situation. Companies like Boeing, Wal-Mart (WMT - commentary - Cramer's Take) and Home Depot (HD - commentary - Cramer's Take) have a lot of leverage over their vendors, extracting the most onerous of payment terms from them. By not paying up quickly, Boeing is, in effect, accessing the capital of vendors on an interest-free basis. This is a good thing, not a bad thing. I'm sure the vendors don't like it at all, but it makes for very efficient use of capital for the company with the power.

Question: Can you talk about how options are treated for tax purposes? I understand some people exercised options during the go-go years and then did not have enough to pay taxes after the stocks tanked.

-- B.A.

Answer: It's easiest to answer your question with an example. Assume you hold an option for 10,000 shares with a strike price of $10, and the stock is trading at $20. When you exercise that option, you're on the hook for some hefty taxes. If you exercise when the stock is at $20, then your gain of $100,000 is taxable as ordinary income. If you don't sell enough stock to at least pay your income tax bill, it is conceivable that the stock could drop to a very low level -- even to zero -- and you'd still owe tax on that $100,000 in "income."

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, Alsin and/or ACM was long Boeing, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.