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Ethics In Action
Case 1. Design incorporated experienced a downturn in December sales. To make matters worse, many of the recent sales were on account; because many customers were not paying on their accounts, the ending balance of
Jim became worried because he remembered the bank telling him about the importance of strong operating cash flows, so he told the accountant to redo the statement but not to reduce the net income by the accounts receivable increase or the gain on the land sale. The accountant refused because these adjustments were necessary in order to properly arrive at the net cash provided from operating activities. If these adjustments were not made, then the net change in cash could not be reconciled. Jim finally agreed out then told the accountant to just include the cash proceeds from the sale of land in the operating activities rather than in the investing activities The accountant said that would be wrong. Besides. everyone would know that proceeds from the sale of land should be an investing activity. Jim then suggested listing it as “other” in the operating section so no one would ever know that it wasn’t an operating cash flow.
Why didn’t Jim want the accountant to decrease the net income by the increase in accounts receivable and the gain on the land sale? Why do you think Jim finally agreed with the accountant? Could the operating cash flows be increased by including the cash proceeds from the sale but listing them as “other” rather than as land sale proceeds? What ethical concerns are involved? Do you have any other thoughts?
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