Question

Wisconsin Farms is a wholesaler of agricultural supplies. It has stockholders who have been paid a total of one million dollars in cash dividends for seven consecutive years. It has a board policy that requires that in order for this dividend to be declared, net cash provided by operating activities as reported in Wisconsin Farms' cash flow statement must exceed one million dollars. President and CEO Dwight Schruten's job is secure so long as he produces annual operating cash flows to support this dividend. At the end of the current year, controller Bigus Tuna presents Dwight Schruten 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 Bigus, "We must get amount above one million. Isn’t there some way to increase operating cash flow by another $30,000?" Bigus 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, Bigus." Upon close scrutiny of the statement of cash flows, Mr. Tuna concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, two-year note payable listed in the financing activities section as "Proceeds from bank loan - $60,000." He will report the note instead as an "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, Bigus! I knew I could count on you," exults the president. Address the following questions: Who are the stakeholders in this situation? Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions? Are the board members or anyone else likely to discover the misclassification?

Answer 1

Facts of the Scenario: Her e as per the Board requirment the dividened policy clearly states that the dividend will be paid out only in one case of when entity hold exess cash of 1 Milion dollar from pperating activity.

Who are the stakeholders in this situation?:   Stakeholders in this current situation are

Cash flow is the part of the Financial Statement hence, Investors, Statutory Regulators, Stock holders management and Employees etc.

Was there anything unethical about the president’s actions?: Yes, the unethical is they are working for individual benfits and not for the growth of the organsiation. They are no longer interested in the well beinhg or growth of the entity. Looking for Personal and individual amoulments only.

Was there anything unethical about the controller’s actions?: Yes, Controller is making wrong classification as well as wrong presentation of the same. becasue, if they treat it as Accounts payable it means Cash has increase over a period, against which purchase will also be required to shown or the net impact of the same either t o be given in Investing activity. only then the impact for the same wil be nullified. If the Same has been shown as increase in inventories then impact will be nullified.

AS on Controller Position which is the KMP position and misreprensting the cash flows to some how to support the payout of dividend over the period will be impact in futures as it will not show true picture to the management and the decision maker over the cash flow generation of the particular period.

Hence the act of the controller is not justified. They require to treat the amount correct and doing the things with intentions would laid sevre penalty in the name of the comapny as well let them behind the bas also.

Are the board members or anyone else likely to discover the misclassification?: Members of the Board will discover the misrepresentation over the reconciliation of the creditors and difference of 60 K will be reflected. Secondly Bank Loan will be disbursed in the bank itself, balance from Bank stament and Balance as per books need to be authenticated. These two action sare sufficient to detect the different teatment in Cash flows and Financial Statements.