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Question: ETHICS (Cash Flow Reporting)

Brockman Guitar Company is in the business of manufacturing top-quality, steelstring 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, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company鈥檚 poor performance in recent years. In particular, the company鈥檚 lead bank, First Financial, is especially concerned about Brockman鈥檚 inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, 鈥淚 can鈥檛 even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.鈥� Thinking about the banker鈥檚 comment, Barbara 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 鈥渨indow dress鈥� 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 Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

(a) What are the ethical issues related to Barbara Brockman鈥檚 idea?

(b) What would you tell Barbara Brockman?

Step by step solution

01

Definition of Accounting Ethics

The rules and regulations that must be followed by each individual associated with the accounting and financial reporting to prevent the misstatement and misuse of financial information are known as accounting ethics. The governing bodies establish these ethics.

02

Ethical issues

The ethical issue corresponding to Barbara Brockman鈥檚 idea is that she wishes to window dress the statement of the cash flow for getting the loan from the bank. She is trying to misrepresent the financial information to mislead the lenders. Such misrepresentation will create a problem if the business entity cannot perform in future periods.

03

Suggestions

Barbara Brockman must prepare a cash flow statement report that includes the reasons that created the problem relating to a cash position. It must include the reduction in cash due to the acquisition of the factory equipment and unnecessary build-up of the receivables and inventory. The report must also include the ability of the company to generate expected cash from the business operations.

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