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PDtax
PDtax, MBA, CPA
Category: Multiple Problems
Satisfied Customers: 4099
Experience:  Former college tutor and instructor. MBA/CPA, current business consultant/tax pro/writer.
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Moss Exports is having a bad year. Net income is only $60,000.

Customer Question

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 operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the $80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.
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Customer: Requirements1. 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?
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Submitted: 6 months ago.
Category: Multiple Problems
Expert:  PDtax replied 6 months ago.
Hi from Just Answer. I'mCustomer I'll assist.
Expert:  PDtax replied 6 months ago.
I'll work on it tomorrow morning. Please confirm due date.
Customer: replied 6 months ago.
I needed it today but tomorrow at 5:00 pm is the latest
Expert:  PDtax replied 6 months ago.
I am working on this for delivery before 5 pm EST.
Expert:  PDtax replied 6 months ago.
Without reclassifying the receivables, net cash provided by (used in) operations is:Net income ... $60,000Decrease (increase) in accounts receivable ... $(80,000)Net cash provided by (used in) operations ... $(20,000)By reclassifying the receivables to long term, net cash provided by (used in) operations is:Net income ... $60,000Net cash provided by (used in) operations ... $60,000The increase in accounts receivable is instead reported as an increase in long-term receivables under the investing activities section of the cash flow statement. Therefore, while the revised net cash flow from operations figure will make Moss look better, there is no overall change to net cash flow.There are a number of factors to consider regarding the overseas customers that might influence the treatment. Overseas transactions can be guaranteed, with letters of credit or other guarantees, which would reduce risk for both Moss and its lender.Foreign exchange gains/losses on the receivables might be an issue, not discussed herein.Cash basis or accrual basis accounting might render this transaction moot (cash basis reporting would require corresponding adjustment to reported income, while accrual basis income assumes the sales with the (late) receivables.The proposed loan tells nothing about collateral, or what kind of loan is needed. If we assume working capital financing, it is still among the toughest to get, and the foreign receivables move in the cash flow statement might be considered an attempt to mislead the lender.We don’t know what terms were typical for the transactions with Moss and its foreign customers. Those receivables might be under long term terms anyway, for example.Moss could remove the entire foreign sales venture, and report it as a separate division of Moss Exports. This kind of reporting might allow for a line item of “equity in foreign subsidiary” for example, with very little disclosure required. And, this could allow for classification of the receivables as long term, meeting the management’s intent.It is also possible that a company with a Board of Directors could simply have one or more Board members or other members of management purchase the receivables from Moss, injecting cash to close the transaction, and fixing things for financial reporting.If the receivables are correctly classified as current, collection is typically much shorter than 12 months, even with the inevitable delays in shipping, processing, and payment transmittal. I would want to know how the funds are transferred, why credit terms have been relaxed, and the invoice terms. Most banks are sympathetic to temporary collection delays, but we don’t know what the extent of the problem is yet.It is possible other arrangements can be made with the customers. Converting their receivables to longer term paper would do the same thing as is proposed without the ethical considerations. With collateral and/or guarantees, the bank might be more amenable to lending, especially since you have created new assets that could collateralize their new advanced funds.The reclassification would be unethical if the receivables are scheduled or projected to be received in sooner than 12 months, and Moss still reports them as long-term receivables. Thanks for asking at Just Answer. Please leave positive feedback to rate my ssistance and close out your request. I'mCustomer

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