Assignment 2: Ethical Issue Reclassification Of Receivables

Assignment 2 Ethical Issue Reclassification Of Receivablesrespond To

Assignment 2: Ethical Issue: Reclassification of receivables in your initial post, consider the scenario where Moss Exports is experiencing financial difficulty, with net income of $60,000, and is facing overdue payments from two significant overseas customers, leading to an increase in accounts receivable. The company is in need of a loan and considers reclassifying short-term receivables from customers who are behind on payments to long-term receivables to improve its financial appearance. The controller suggests that removing the $80,000 increase in accounts receivable from current assets will enhance net cash provided by operations, potentially aiding the company in securing the loan. Analyze this situation by addressing the following points:

1. Using only the amounts provided, calculate the net cash provided by operations both before and after the proposed reclassification of receivables. Determine which reporting method presents Moss more favorably.

2. Discuss the ethical conditions under which reclassification of receivables would be considered ethical versus unethical. Support your analysis with appropriate reasoning.

By Saturday, March 14, 2015, post your response and engage with at least two classmates' initial posts by the end of the week.

Paper For Above instruction

The ethical dilemma presented by Moss Exports' consideration to reclassify receivables highlights fundamental issues related to financial reporting ethics and the integrity of accounting practices. On the surface, the company's intention to improve its financial appearance to secure a much-needed loan appears justifiable from a business perspective. However, this action raises significant ethical questions about honesty, transparency, and the potential for misleading stakeholders.

Firstly, understanding the calculation of net cash provided by operations is essential. Typically, net cash from operating activities is derived from the company's reported net income adjusted for changes in working capital, including receivables. In the given scenario, the net income is $60,000; the increase in accounts receivable by $80,000 implies that cash collections from customers are lower than reported sales, thus reducing actual cash flow.

Without reclassification, the cash flow statement would reflect this increase as a use of cash, decreasing net cash provided by operations. If the increase in receivables is not reclassified, the net cash provided by operations would be:

Net cash from operations = Net income - Increase in accounts receivable

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

This indicates a negative cash flow from operations of $20,000, possibly hurting the company's appeal to lenders.

Conversely, if the receivables are reclassified as long-term assets, the $80,000 increase would no longer be reflected as a current asset, and thus, the net cash provided by operations would appear improved, showing:

Net cash from operations = $60,000 (net income)

This adjustment would suggest a positive cash flow of $60,000, creating a misleading picture of the company's liquidity position.

The core ethical concern is whether this reclassification constitutes financial statement manipulation. Ethically, reclassification is justified only if the receivables genuinely meet the criteria for long-term classification—which typically requires that the company expects to collect these receivables beyond one year or the operating cycle. If the receivables are still collection-worthy within a short period, reclassifying them as long-term would be misleading, violating ethical standards of financial reporting (American Institute of Certified Public Accountants [AICPA], 2018).

Reclassification might be ethical if the company has substantial evidence indicating that collection of the receivables will not occur within the next year, such as contractual agreements or consistent historical delay patterns that justify long-term classification (Financial Accounting Standards Board [FASB], 2018). An example would be receivables tied to long-term contracts or payment arrangements explicitly extended beyond one year. In such cases, reclassification aligns with financial reporting standards and provides an honest view of the company's financial health.

In contrast, reclassifying receivables solely to inflate cashflow figures to appear more attractive to lenders is unethical because it involves deliberate misrepresentation. It compromises the integrity of financial statements and misleads stakeholders, including investors and creditors, eroding trust and violating generally accepted accounting principles (GAAP). Such actions may have legal consequences and damage the company's reputation if discovered.

In conclusion, while adjusting receivables classification can be ethically justified under certain conditions where valid criteria are met, doing so merely to improve financial appearance without substantive basis is unethical. Companies must uphold transparency and accuracy in financial reporting, balancing the need for favorable presentation with adherence to ethical standards and accounting principles.

References

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