Chapter 15: QE1 (page 857)

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?

Short Answer

Expert verified

Net cash provided/(used) by operations without reclassification is ($20,000).

Step by step solution

Computation of net cash provided by operations

Without reclassification:

Particulars	Amount ($)
Net Income	60,000
Less: Increase in account receivables	(80,000)
Net cash provided/ (Used) by operations	(20,000)

With reclassification:

Particulars	Amount ($)
Net Income	60,000
Add: Decrease in account receivables	80,000
Net cash provided/ (Used) by operations	140,000

Analysis

The reclassification would be ethical only if the payment is received from the account receivables. Otherwise, reclassification without receiving payment is unethical.

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RANDALL DEPARTMENT STORES, INC. Income Statement Compared with Industry Average Year Ended December 31, 2018
	Randall	Industry Average
Net Sales Revenue	\( 783,000	100.0%
Cost of Goods Sold	527,742	65.8
Gross Profit	255,258	34.2
Operating Expenses	163,647	19.7
Operating Income	91,611	14.5
Other Expenses	6,264	0.4
Net Income	\) 85,347	14.1%

RANDALL DEPARTMENT STORES, INC. Balance Sheet Compared with Industry Average December 31, 2018
	Randall	Industry Average
Current Assets	\( 310,040	70.9%
Property, Plant, and Equipment, Net	119,600	23.6
Intangible Assets, Net	7,360	0.8
Other Assets	23,000	4.7
Total Assets	\) 460,000	100.0%

Current Liabilities	\( 210,680	48.1%
Long-term Liabilities	103,960	16.6
Total Liabilities	314,640	64.7
Stockholders’ Equity	145,360	35.3
Total Liabilities and Stockholders’ Equity	\) 460,000	100.0%

1..Includes the income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows	a. Notes to financial statements
2. Attests to the fairness of the presentation of the financial statements.	b. Report of independent registered public accounting firm
3. Includes a summary of significant accounting policies and explanations of specific items on the financial statements.	c. Management’s discussion and analysis of financial condition and results of operations (MD&A)
4. Is written by the company to help investors understand the results of operations and the financial condition of the company.	d. Financial statements

ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

Short Answer

Step by step solution

Computation of net cash provided by operations

Analysis

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