QE1
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
Verified
Net cash provided/(used) by operations without reclassification is ($20,000).
Without reclassification:
Particulars | Amount ($) |
Net Income | 60,000 |
Less: Increase in account receivables | (80,000) |
Net cash provided/ (Used) by operations | (20,000) |
With reclassification:
Particulars | Amount ($) |
Net Income | 60,000 |
Add: Decrease in account receivables | 80,000 |
Net cash provided/ (Used) by operations | 140,000 |
The reclassification would be ethical only if the payment is received from the account receivables. Otherwise, reclassification without receiving payment is unethical.