Moss Exports Has A Bad Year, Net Income Is Only $60,000

Moss Exports Is Having A Bad Year Net Income Is Only 60000 Also T

Moss Exports is experiencing financial difficulties, with a reported net income of only $60,000. Additionally, two major overseas customers are behind on their payments, causing accounts receivable to increase significantly. In an effort to secure a loan, the company's management considers reclassifying some receivables as long-term assets to improve the presentation of financial statements. The company's bank examines cash flow from operating activities closely when evaluating loan applications. The controller, Daniel Peavey, suggests that reclassifying the $80,000 increase in accounts receivable as a long-term receivable might inflate cash flow from operating activities by excluding this amount from current assets. This move aims to make the company's cash flow appear stronger, potentially increasing the likelihood of loan approval. The decision to reclassify receivables involves ethical considerations, as it may misrepresent the company's financial position. Therefore, the key questions are: 1) How does reclassifying receivables affect the calculation of net cash provided by operating activities? Which approach presents a better image of the company’s cash flow? 2) Under what circumstances would reclassification be considered ethical or unethical?

Paper For Above instruction

Financial reporting plays a pivotal role in the assessment of a company's financial health, especially when it comes to loan applications and investor confidence. The decision to reclassify receivables has significant implications on the perceived cash flow of a company. Typically, net cash provided by operating activities is calculated by adjusting net income for changes in working capital, including accounts receivable. An increase in accounts receivable indicates that more sales are made on credit, which, in the short term, reduces cash inflow because cash has not yet been received.

In the scenario provided, Moss’s net income is $60,000. Assuming no other adjustments, the change in accounts receivable of $80,000 is an outflow from operating activities because it signifies cash that has yet to be collected. Without any reclassification, the net cash provided by operations would typically be calculated as:

Net cash from operating activities = Net income – Increase in accounts receivable

Using the figures provided, this would be $60,000 – $80,000 = –$20,000. This indicates a negative cash flow from operations, reflecting the cash flow impact of rising receivables.

Now, if the company reclassifies the $80,000 of receivables as long-term, it removes this amount from current assets. The reclassification suggests that the receivables are not expected to be collected within the next year, and therefore, the decrease in cash flow from this receivable is not recognized in current operations. Mathematically, this reclassification would suggest that:

Net cash from operating activities = Net income – (change in current receivables, adjusted by reclassification)

Given the reclassification, the increase in receivables is excluded, implying that the net cash flow from operations would appear as $60,000, a positive figure, implying improved cash flow. This presentation makes Moss look better to lenders, as it artificially inflates cash flow by ignoring the current period’s increase in receivables.

From an ethical perspective, reclassification is justifiable only under certain conditions. Reclassifying receivables as long-term is ethical if the company genuinely expects these receivables to be collected over a period longer than one year, and there is documented evidence supporting this expectation. For example, if the company has a history of extended credit terms or if negotiations indicate that payments will be delayed, reclassification could be appropriate. Conversely, if the receivables are indeed overdue and collection is uncertain or unlikely within a reasonable timeframe, reclassification would be considered an act of financial misrepresentation and therefore unethical.

In conclusion, manipulating receivables classification to improve cash flow statements can be misleading if not based on solid evidence. While reclassification can be ethical under genuine, justifiable circumstances, it often borders on unethical if used solely to paint a more favorable picture. Financial transparency and accuracy should always take precedence over short-term appearances, especially since stakeholders rely on truthful disclosures for decision-making.

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