Question

Cash Flow Reporting)

Brockman Guitar Company is in the business of manufacturing top-quality, steel-string 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's poor performance in recent years. In particular, the company's lead bank, First Financial, is especially concerned about Brockman's inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can't even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.”

Thinking about the banker's 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 “window dress” 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's idea?

(b)  

What would you tell Barbara Brockman?

Answer 1

A. Though these transactions as per Barbara may seem to increase the cash flow from operations as she thought, it is not at all advisable to do so because, strictly speaking they cannot constitute income from operations. Rather she was in a thought of window dressing, and wanted to do so, but the idea was totally wrong and it cannot be considered as cash flow from operations since, its actual operations are selling guitars and not the ones what she thought of.

Importantly, window dressing itself is an unethical issue which may seem.to be beneficial in the present situation but may ruin the company in future in an adverse manner which we can observe in the society practically.

B. In this present situation ,rather than going for window dressing and in my personal opinion I feel the company should better merge with another profitable company and hence it could at first sustain and then can enhance its position rather than doing the activities which Barbara thought because if she resorts to do so, the company and at times, even she may get into negative consequences in future.

Hence, I feel that Barbara shouldn't act as per her opinion and think of any other better alternative.