The Adams Brothers have decided to obtain the loan from the bank for the $1,000,000 to start the adventure camps. Analysis of Adams Brothers Outdoor Adventures operating cash for the year shows an increase in Accounts Receivables. Further analysis reveals that a couple of the businesses' corporate clients have been very slow in paying, resulting in a decline in operating cash flows. Sam suggests moving the accounts of the slow-paying clients from Accounts Receivable to a long-term liability account to make the company's financial statements look better. What impact might this have on the statement of cash flows? Will this make the company look better "on paper"? Could it help the company get the loan? Why/why not? Under what condition would this reclassification of Accounts Receivable be ethical? Unethical?
The impact of moving the outstanding receivables to a long-term liability account will increase the net cash provided by operating activities on the statement of cash flows. This is because subtracting a less number of increased accounts receivable from the net income before dividends and the additional sources of cash results in higher net cash provided by operating activities.
The removal of this ...
The solution examines ethical decisions in accounting. Under what conditions something would provide reclassification of accounts receivable be ethical or unethical.