Ethical Issue: Reclassification of Receivables
Respond to the following ethical issue concerning the reclassification of receivables in your initial post:
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 operations. Daniel Peavey, Moss’s controller, suggests reclassifying as long-term the receivables from the slow-paying clients. He explains to the board that removing the $80,000 rise in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.
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? Support your response.