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Chapter 14: Q15_1EI (page 798)

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

1) The transfer of the accounts receivable from current assets to long-term improves Moss Exports' appearance.

2) The reclassification would be unethical because it would be false on the Balance Sheet's Allowance for Doubtful Accounts and the Statement of Cash Flow.

Step by step solution

01

Meaning of Cash Flow from Operation

The amount of money a company makes from its regular business operations is known as cash flow. It is displayed in the cash flow statement's operating activities, cash used, and cash provided columns. It is one of the company's primary pursuits.

02

(1) Computing net cash provided by operations

Without Reclassification

With Reclassification

Net Income

$ 60,000

$ 60,000

Increase in account receivable

(80,000)

0

Net Cash Provided by Operating Activities

$ (20,000)

$ 60,000

Moss Exports looks better with reclassifying the Accounts Receivable from current assets to long-term.

03

(2) Explaining the reclassification on the subject of ethical and unethical

Since the reclassification would be inaccurate on both the Statement of Cash Flow and the Allowance for Doubtful Accounts on the Balance Sheet, it would be immoral. Additionally, the assets would still be categorized as short-term if the contract terms required the consumer to pay within a shortperiod. Working with the clients to convert their accounts receivable into a note receivable with longer payment terms would be one method to make the situation ethical.

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Most popular questions from this chapter

Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

1. Cash receipt from the sale of equipment

2. Cash payment for salaries

3. Cash receipt from the collection of long-term notes receivable

4. Purchase of equipment in exchange for notes payable

5. Cash receipt from the issuance of common stock

Preparing the statement of cash flows-indirect statement This problem continues the Canyon Canoe Company situation from Chapter 13. Canyon Canoe Company's comparative balance sheet is shown below. 2019 amounts are assumed, but include several transactions from prior chapters.

Additional data fellow:

  1. The income statement for 2019 included the following items: Net income, \(417,000. Depreciation expense for the year, \)34,330. Amortization on the bonds payable, \(254.
  2. There were no disposals of property, plant and equipment during this year. All acquistions of PP&E were for cash except the land, which was acquired by issuing preferred stock.
  3. The company issued bonds payable with a face value of \)210,000, receiving cash of \(208,476.
  4. The company distributed 4,000 shares of common stock in a stock dividend when the market value was \)4.50 per share. All other dividends were paid in cash.
  5. The common stock, except for the stock dividend, was issued for cash.
  6. The cash receipt from the note payable in 2019 is considered a financing activity because it does not relate to operations. Requirements Prepare the statement of cash flows for the year ended December 31, 2019, using the indirect method.

Classifying cash flow items Consider the following transactions:

  1. Purchased equipment for \(130,000 cash.
  2. Issued \)14 par preferred stock for cash.
  3. Cash received from sales to customers of \(35,000.
  4. Cash paid to vendors, \)17,000.
  5. Sold building for \(19,000 gain for cash.
  6. Purchased treasury stock for \)28,000.
  7. Retired a notes payable with 1,250 shares of the company’s common stock.

Identify the category of the statement of cash flows in which each transaction would be reported.

Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Computing cash flow items—direct method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory
See all solutions

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