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1. XYZ manufactures candy and sells only to retailers. It’s not a publicly owned company and its financial statements are not audited.
In October, management met to discuss the fiscal year ending December 31. Due to a sluggish economy, the company was having difficulty collecting its accounts receivable and its cash position is unusually low. Management knew that if the December 31 balance sheet will not look good, the company will have difficulty borrowing money to boost production for the following year
The purpose of the meeting was to explore ways in which the company can improve its December balance sheet. Some of the ideas are as follows:
1. Offer customers a 10% discount if they make payments immediately instead of the usual 30 days.
2. Allow a 30 day grace period on all accounts receivable at the end of the year. As these accounts will no longer be overdue, the company will not need to provide for uncollectible receivables
3. For purposes of balance sheet presentation, combine all forms of cash, including cash equivalents, compensating balances, and unused lines of credit
4. Require officers who have borrowed money from the company to repay the amount owed at December. This would convert into cash the “ notes receivables from officers” which now appear in the balance sheet as non-current assets (long term receivables)
5. Present investments in marketable securities at their market value, rather than at cost
6. Stop all payments to suppliers in December to increase cash
7. On December 31, draw a large check against one of the company’s account in Bank A and deposit in another company’s account in bank B. The check will not clear the bank A after year end. This will substantially increase the amount of cash in bank accounts at year end
Separately evaluate each of these proposals. Consider ethical issues as well as accounting issues
Do you consider it ethical for management to hold this meeting and plan in advance how to improve financial statements that will be distributed to creditors and investors?
2. Robert L is the controller of Print Technologies, a publicly traded company. The company is experiencing financial difficulties and is aggressively looking for ways to reduce costs.
The CEO instructs Robert to lengthen from 5 to 10 years the useful life of some special purpose machinery. The CEO believes that this will represent a substantial cost savings as it will reduce the depreciation expense.
1. Discuss this idea from a net income and cash flow point of view
2. Discuss any ethical issues that Robert should consider with respect to this instruction.
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