Question

Assume you serve on the board of a local golf and country club. In preparation for renegotiating the club’s bank loans, the president indicates that the club needs to increase its operating cash flows before the end of the current year. The club’s treasurer reassures the president and other board members that he knows a couple of ways to boost the club’s operating cash flows. First, he says, the club can sell some of its accounts receivable to a collections company that is willing to pay the club $97,000 up front for the right to collect $1 00,000 of the overdue accounts. That will immediately boost operating cash flows. Second, he indicates that the club paid about $200,000 last month to relocate the 18th fairway and green closer to the clubhouse. The treasurer indicates that although these costs have been reported as expenses in the club’s own monthly financial statements, he feels an argument can be made for reporting them as part of land and land improvements (a long-lived asset) in the year-end financial statements that would be provided to the bank. He explains that, by recording these payments as an addition to a long-lived asset, they will not be shown as a reduction in operating cash flows.

Required:

1. Does the sale of accounts receivable to generate immediate cash harm or mislead anyone? Would you consider it an ethical business activity?

2. What category in the statement of cash flows is used when reporting cash spent on long-lived assets, such as land improvements? What category is used when cash is spent on expenses, such as costs for regular upkeep of the grounds?

3. What facts are relevant to deciding whether the costs of the 18th hole relocation should be reported as an asset or as an expense? Is it appropriate to make this decision based on the impact it could have on operating cash flows?

4. As a member of the board, how would you ensure that an ethical decision is made?

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Answer 1

Requirement 3: If the said expenses are recurring in nature, then they should be classified as revenue expenses, otherwise should be reported as asset. It is not appropriate to make decision based on the impact it could have on opearting cashflows. Requirement 4; The desire to perform made corporations to manipulate their financial staements. Several finance scandals do tell the same and it is the pressure from the board that is reason for the manipulations As a member of board, ensure that there is no pressure from the board to manipulate the books to improve the operating cash flows. It would help to make ethical decisions.