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.

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?

Under what condition would the reclassification of the receivables be ethical? Unethical?

Answer 1

of Net Computation Cash: without reclassification 60000 Net income Doubtful de bts s. not added or] deducted] 80000 (Not added or subtracted) Net cash 6oooo with re classification 60000 Net income 80000 long term loan Tassed] i. Net Cash 140000 . Reclassification looks better, but it is unethical.

Summary: Net income - $60,000 * Account receivable from a overseas customer are ballooning. & Reclassifying the receivable from slow paejing claints as long-term, then it becomes an asset. Otherwise it becomes doubtfel debt. & So, Reclassification increase $80000 to Net Cash. Net cash $60000 + $80000 = $140,000