CLASS ASSIGNMENT

CLASS ASSIGNMENT:

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?

STUDENT 1: Joshua

Moss Exports is having a rough year. With two of its important customers falling behind on their payments, increases in accounts receivables is negatively impacting the company’s cash flow from operating activities. This combined with the need for a loan, has the company and its board and controller scrambling for ways to make the financial statements more attractive to possible creditors. The trick that the controller is suggesting is manipulating the cash flow statement to make the company appear to have more net cash.

To find the net cash from operating activities the controller will take the net income, $60,000, and add in any depreciation expenses, any decreases in merchandise inventory, any increases in accounts payable; and subtract any gains on disposal of plant assets, any increases in accounts receivable, and any decreases in accrued liabilities. In this problem the only adjustment given is an increase of accounts receivable for a total of $80,000. The controller has suggested to reclassify the accounts receivable as long-term instead of their current status of short term to positively impact the net cash. Thus:

No reclassification cash flow:

$60,000- $80,000= ($20,000)

With reclassification:

$60,000-0= $60,000

When accounts are short term, an increase in accounts receivable will decrease the cash flow, but long term account receivables do not have this same effect on the cash flow statement.

However, manipulating these accounts and reclassifying them with complete autonomy to attempt to receive a loan is entirely unethical and may border fraud. If it was possible for the company to discuss the accounts receivables with the overseas companies and come to terms with them lengthening the payment period and thus truly reworking them into long-term assets, then the company would be performing a more ethical attempt at securing the loan.

Reference:

Miller-Nobles, T.L., Mattison, B., & Matsumura, E.M. (2018). Horngren’s Accounting. United

States: Pearson Education.

STUDENT 2: Megan

Moss Exports has claimed that their net income is $60,000. However, they have two overseas customers that have not been making their payments, yet they are still receiving merchandise from Moss Exports. This, in turn, has resulted in Moss Exports’ Accounts Receivable account increasing and unfortunately the Cash account has not been increasing as much. With Moss Exports in need of a loan, their bank explained that the business should remove the loans to make Moss look better, by benefiting Moss Exports’ net income.

If Moss Exports were to not reclassify the Accounts Receivable account, the net cash provided by operating activities would be -$20,000. This can be calculated by subtracting the Accounts Receivable amount from the net income amount:

Net cash provided by operating activities = Net income – Accounts Receivable

-$20,000 = $60,000 – $80,000

If Moss Exports were to reclassify the Accounts Receivable account by removing it from their calculation of net cash provided by operating activities, the new amount of net cash would be $60,000. The Accounts Receivable amount goes from $80,000 to $0. The net cash amount can be solved using the same equation above for not reclassifying the amount.

$60,000 = $60,000 – $0

Moss Exports would look better when applying for a loan if they were to reclassify the Accounts Receivable amount and report that the net cash provided by operating activities is $60,000.

The method of reclassifying the Accounts Receivable, however, is not ethical. By reclassifying the account, Moss Exports would be lying about the amount of money they have. Additionally, it would violateGAAP because Moss Exports accounting would not be faithfully represented. While it would benefit them from lying, the guidelines and rules set by banks are put in place to help people, not affect them in a negative way. Banks will not give out loans if they think an individual will not be able to pay it back – this helps the bank ensure their finances and it helps the individual borrowing the money by saving their credit and not placing a financial burden on them.

Moss Exports should not reclassify their Accounts Receivable account, instead, they should consider taking action to get the money from their overseas customers and perhaps discuss options with their bank.

Reference

Miller-Nobles, Tracie L. Horngren’s Accounting, 12th Edition. Pearson, 2017. VitalBook file.

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Last Updated on February 11, 2019 by EssayPro