Best Exports has noticed their current year net income is only $60,000. In order to get...

Best Exports has noticed their current year net income is only $60,000. In order to get a loan from their bank to assist the business they will need to provide a statement of cash flows. In reviewing the statement of cash flows, you notice a large increase ($80,000) in accounts receivable due to two of your largest customers being behind in payments. Since the bank looks at the operating activities, this increase will create concern. You make a suggestion to reclassify the accounts receivables to long-term, thus removing them from current assets will increase the net cash from operations.

Under what circumstances would this reclassification be considered ethical or unethical? Support your selection by finding an article which explains your choice.

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Expert Solution

Answer: The question is not specific which accounting standards are applicable to the organization. Assuming IFRS.

Current assets are those assets that are expected to be used (sold or consumed) within 12 months.

Current assets include (according to the IFRS):

Current inventories
Trade and other current receivables
Current tax assets
Current biological assets
Other current financial assets
Other current non-financial assets
Cash and cash equivalents
Current non-cash assets pledged as collateral for which transferee has right by contract or custom to sell or repledge collateral

On a balance sheet (statement of financial position), assets are typically classified into current assets and non-current assets (long-term assets). An entity shall classify an asset as current when (IFRS, IAS 1):

it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
it holds the asset primarily for the purpose of trading;
it expects to realise the asset within twelve months after the reporting period; or
the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

All other assets shall be classified as non-current assets.

Thus, if there is no certainty that the accounts receivable will realize into cash in 12 months, then they can be classified to Non-current assets.

ekkarill92 answered 8 months ago

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