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Puebla Corporation is a medium-sized wholesaler of automotive parts. It has ten
stockholders, who have been paid a total of $1 million in cash dividends for eight consecutive
years. The policy of the Board of Directors requires that in order for this dividend to be declared,
net cash provided by operating activities as reported in Puebla's current year's statement
of cash flows must be in excess of $1 million. President and CEO Phil Monat's job is secure so
long as he produces annual operating cash flows to support the usual dividend.
At the end of the current year, controller Rick Rodgers presents president Monat with
some disappointing news: The net cash provided by operating activities is calculated, by the indirect
method, to be only $970,000. The president says to Rick, "We must get that amount above
$1 million. Isn't there some way to increase operating cash flow by another $30,000?" Rick answers,
"These figures were prepared by my assistant. I'll go back to my office and see what I
can do." The president replies, "I know you won't let me down, Rick."
Upon close scrutiny of the statement of cash flows, Rick concludes that he can get the operating
cash flows above $1 million by reclassifying a $60,000, 2-year note payable listed in the
financing activities section as "Proceeds from bank loan-$60,000." He will report the note instead
as "Increase in payables-$60,000" and treat it as an adjustment of net income in the operating
activities section. He returns to the president saying, "You can tell the Board to declare
their usual dividend. Our net cash flow provided by operating activities is $1,030,000." "Good
man, Rick! I knew I could count on you," exults the president.
(a) Who are the stakeholders in this situation?
(b) Was there anything unethical about the president's actions? Was there anything unethical
about the controller's actions?
(c) Are the Board members or anyone else likely to discover the misclassification?
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For a given situation, this solution answers questions regarding stakeholders, unethical actions, and misclassification.
A) The stakeholders are the stockholders, the Board of Directors, the CEO Phil Monat's, and the controller, Rick Rogers.
B) The CEO was unethical by not investigating how Rick Rogers accomplished an increase in the net cash flow. In fact, ...
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