Assignment 2 Ethical Issue- Reclassification of Receivables

7 Oct No Comments

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 operations. Daniel Peavey, Moss’s controller, suggests reclassifying as long-term the receivables from the slow-paying clients. He explains to the board that removing the $80,000 rise in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

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? Support your response

SOLUTION 1:

Cash Flow from Operations:  
   
Particulars Amount
   
Without reclassification:  
Net Income $ 60,000.00
   
Working Capital Changes:  
Less: Increase in Current Assets  
Accounts Receivable $ (80,000.00)
   
Cash provided by Operations $ (20,000.00)
   
With reclassification:  
Net Income $ 60,000.00
   
Working Capital Changes:  
Less: Increase in Current Assets  
Accounts Receivable $ –
   
Cash provided by Operations $ 60,000.00

The cash provided by operations without reclassification is ($80,000) and with reclassification is $60,000. The second situation i.e. with reclassification looks better as it shows the cash generated by operations. In the first situation, i.e. without reclassification the cash was used in operations and this will give a negative impact about the company to its stakeholders.

SOLUTION 2:

The effect of classification or no classification on cash balance will be zero as $80,000 will be shown as a cash outflow in long-term receivables (as advance made to customers). The reclassification will be considered as ethical if the company comes up with an agreement with its overseas customers with new repayment agreements and $80,000 is deemed as collectible. However, if the company is only reclassifying its bad debts to long-term receivables, then it is unethical.




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