Q15_1EI - Horngren'S Financial And Managerial Accounting

Question

  Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan. 

Requirements 

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better? 
2. Under what condition would the reclassification of the receivables be ethical? Unethical?

Step-by-Step Solution

Answer

1)  The transfer of the accounts receivable from current assets to long-term improves Moss Exports' appearance.

2) The reclassification would be unethical because it would be false on the Balance Sheet's Allowance for Doubtful Accounts and the Statement of Cash Flow.

Step 1: Meaning of Cash Flow from Operation

The amount of money a company makes from its regular business operations is known as cash flow. It is displayed in the cash flow statement's operating activities, cash used, and cash provided columns. It is one of the company's primary pursuits.

 

Step 2: (1) Computing net cash provided by operations

	Without Reclassification	With Reclassification
Net Income	$      60,000	$      60,000
Increase in account receivable	(80,000)	0
Net Cash Provided by Operating Activities	$ (20,000)	$ 60,000

 

Moss Exports looks better with reclassifying the Accounts Receivable from current assets to long-term.

Step 3: (2) Explaining the reclassification on the subject of ethical and unethical

Since the reclassification would be inaccurate on both the Statement of Cash Flow and the Allowance for Doubtful Accounts on the Balance Sheet, it would be immoral. Additionally, the assets would still be categorized as short-term if the contract terms required the consumer to pay within a shortperiod. Working with the clients to convert their accounts receivable into a note receivable with longer payment terms would be one method to make the situation ethical.