This week's Discussion is centered on the case scenario presented on page 819 in your textbook - BYP17-7 Ethics Case.

Since cash is the most important asset in a firm, success of a firm can be directly traced to its cash management. Though we would discourage reliance on cash flows to the exclusion of accrual accounting, comparing cash from operations to net income can reveal important information about the quality of reported net income.

Please review the Ethic Case scenario on page 819 of your text and answer the following questions.

1. Who are the stakeholders in this situation? Should they be the preparers main concern? Why? Why not?
2. Was there anything unethical about the President s actions? Was there anything unethical about the controller s actions? Explain
3. Are the board members or anyone else likely to discover the misclassification? Explain.

This is page 819

 

 

Tappit Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Tappit s current year s statement of cash flows must exceed $1 million. President and CEO Willie Morton 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 Robert Jennings presents president Willie Morton 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 Robert, We must get that amount above $1 million. Isn t there some way to increase operating cash flow by another $30,000 Robert 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, Robert.

 

Upon close scrutiny of the statement of cash flows, Robert 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, Robert! I knew I could count on you, exults the president.