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Durocher Guitar Cash Flow Reporting

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Durocher Guitar Company is in the business of manufacturing top quality, steel-string folk guitars. In recent years the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Laraine Durocher, has attempted to raise cash from various financial institutions, but to no avail because of the company's poor performance in recent years. In particular, the company's lead bank, First Financial, is especially concerned about Durocher's inability to maintain a positive cash position. The commercial loan officer from First Financial told Laraine, 'I can't even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.'

Thinking about the banker's comment, Laraine came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To 'window dress' cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Durocher Guitar, it is your job to tell Laraine what you think of her plan.

Instructions

Answer the following questions.
(a) What are the ethical issues related to Laraine Durocher's idea?
(b) What would you tell Laraine Durocher?

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Solution Summary

This solution provides a detailed explanation of the given accounting questions.

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ANSWERS

Question A
The only ethical issue related to Laraine Durocher's idea is whether to provide full information to First Financial as regards the sale of ...

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