Moss Exports is having a bad year. Net income is only $60,000. Also, two important overseas customers are filling 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?
Want to see the full answer?
Check out a sample textbook solutionChapter 14 Solutions
Horngren's Financial & Managerial Accounting, The Financial Chapters, Student Value Edition (5th Edition)
- Davis Construction Company has not been doing very well lately. The controller is looking over the invoices for bills that need to be paid this week, and realizes the company is approximately $7,000 short. The only account with excess cash is mandated to be used only for cases of workers' compensation. Can the controller pull the money from that account? O No, that is a short-term investment account, and the money cannot be converted into cash that quickly. O Yes, it is a cash equivalent account, which can be used to supply the money for the bills as long as the money is replaced within the month. O No, that is restricted cash and the money cannot be taken out to cover other expenses. O Yes, it is restricted cash, but as long as the money is replaced within a month of being taken out, it will balance out fine.arrow_forwardReed Kohler is in his final year of employment as controller for Quality Sales Corporation: he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm's net income before bonus and income taxes - the larger the net income, the larger the bonus. Due to a slowdown in the economy due to Coronavirus, the company has encountered difficulty in managing its cash flow. The company auditors have recommended that the company change its inventory method from FIFO to LIFO . The change would cause a significant increase in the cost of goods sold for the year. Kohler thinks the company shouldn't switch to LIFO b/c its inventory quantities are too large. After expressing this opinion to the firm's treasurer, Kohler is stunned at the treasurer's reply "Reed, I can't believe that after all these years with the company, you put your personal interests ahead of the companies…arrow_forwardThe Board of Directors were worried over the dwindling financial performance and precariousfinancial position of the Company. The company products were ageing; the economicdepression biting harder as a result of the fluctuating exchange rate due to Brexit. TheCompany imports 60% of the goods sold in Garden City. The fluctuating exchange rate hadaffected the company’s importation. Consequently, the revenue of the Company droppedsignificantly. Write a brief and formal technical report to the Board of Directors to assess theperformance, liquidity and stability of company using only:i) Return on Capital Employedii) Total Assets Turnoveriii) Quick Ratioiv) Fixed Interest Coverv) Debt Equity Ratioarrow_forward
- The Board of Directors were worried over the dwindling financial performance and precariousfinancial position of the Company. The company products were ageing; the economicdepression biting harder as a result of the fluctuating exchange rate due to Brexit. TheCompany imports 60% of the goods sold in Garden City. The fluctuating exchange rate hadaffected the company’s importation. Consequently, the revenue of the Company droppedsignificantly.You are required to:A) Calculate the following ratios for the year ended September 30, 2015 and 2016 in Columnarform:i) Return on Capital Employedii) Total Assets Turnoveriii) Quick ratioiv) Debt Equity Ratiov) Fixed Interest covervi) Earnings Yieldvii) Price Earnings RatioViii) Dividend Yield The first 3 has been calculated : Return on capital employed for 2016 is 40.32% and for 2015 is 86.84%. 2016 2015 Capital employed = 96500-43800 =52 700 Capital employed = 107500-60000 = 47500 Return on capital employed = 21250/52700 x 100…arrow_forwardKatie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in Year 4, and cash flows from operations will probably be down 25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for Years 1 through 4 and will want a projected number for Year 5. Murphy knows that a steady progression upward in operating cash flows for Years 1 through 4 will help her case. She decides to use her discretion as owner and considers several business actions that will turn her operating cash flow in Year 4 from a decrease to an increase. Required 1. Identify two business actions Murphy might take to improve cash flows from operations. 2. Comment on the ethics and possible…arrow_forwardLetni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts. Age Group OperatingRevenue AccountsReceivable AverageAge AccountsWritten Off Two years ago $1,160,000 $136,000 5 days $0 Last year 1,460,000 146,000 7 days 1,000 Current year 1,560,000 316,000 40 days 0 Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for…arrow_forward
- Letni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts. Age Group OperatingRevenue AccountsReceivable AverageAge AccountsWritten Off Two years ago $ 1,160,000 $ 136,000 5 days $ 0 Last year 1,460,000 146,000 7 days 1,000 Current year 1,560,000 316,000 40 days 0 Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for uncollectible accounts be…arrow_forwardLetni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts. Age Group OperatingRevenue AccountsReceivable AverageAge AccountsWritten Off Two years ago $1,160,000 $ 136,000 5 days $0 Last year 1,460,000 146,000 7 days 1,000 Current year 1,560,000 316,000 40 days 0 Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for uncollectible accounts be…arrow_forwardPfizer Pharmaceuticals, Inc. is facing difficulties due to longer average collection period as many of its customers are having liquidity issues and they are delaying payments well beyond the due dates. Furthermore, the bad debt ratio of the company is on the rise as lots of pharmaceutical companies have gone bankrupt or having financial difficulties. In order to address these issues, company is thinking to adopt stringent credit policy in order to reduce bad debt and average collection period. The Management has decided that it will not grant additional credit to any customer beyond 15 days past due on payments. However, such a change of policy has consequences, and it is expected that firm will reduce it current sales to $6.5 million (20% reduction from current level of sale). However, the policy will also help in reduction of bad debts losses by 4% (from 8% to 4%) and average collection period by 35 days (from 110 days to 75 days). The expected decrease in sales will result in…arrow_forward
- Hamish plc expects to have an overdraft at the end of the next financial year. Which one of the following courses of action would increase the bank overdraft? Select one: A. Increasing the credit period allowed to customers. B. Reducing the level of inventory held. OC. Renting, instead of purchasing, the new company vans. D. Increasing the time taken to pay suppliers.arrow_forward46. Mohammed has made an analysis of the two food producing companies in Oman. The analysis is on comparing their cash conversion cycle. Though there was little difference between the two companies but a significant change was observed in the results of previous year to this year. The cash conversion cycle of both companies has increased which means ___________. a. The companies are not managing their account receivables b. The companies are receiving the cash late and payments are made early c. All of the options d. The companies are not effectively managing inventoryarrow_forwardBank Suva was the oldest and largest of the three in a city in a city of 2 million people. Profits had stagnated in recent years. The president was concerned about the erosion of the bank's profitability and wanted to turn the situation around. A research consultant, who was completing his doctorate in business administration, was asked to help the president. Preliminary discussions between the research consultant and the president indicated that a decline in the level of deposits affected profits. The deposits were linked to the bank's competitive position. What is the problem of the case?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning