Question

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.

Answer 1

Reclassifying accounts receivable to long-term can be considered unethical if it is done to mislead stakeholders, but it may be ethical if done in accordance with accounting standards and with full disclosure.

Step-by-step explanation:

The reclassification of accounts receivable to long-term can be considered unethical when it is done with the intention of misleading or deceiving stakeholders, such as the bank or investors. It is important for financial statements to accurately reflect the financial position of a company. Classifying delinquent accounts receivable as long-term, when they are actually short-term, can provide a false picture of the company's liquidity and financial health.

On the other hand, the reclassification may be considered ethical if it is done in accordance with applicable accounting standards and guidelines, and if it accurately reflects the company's intention and ability to collect the outstanding receivables in the long term. For example, if the company has a well-documented plan and evidence to support the collection of the delinquent payments over an extended period of time, reclassifying them as long-term may be appropriate.

It is important for companies to be transparent and provide full disclosure of any reclassifications or adjustments made in their financial statements. This allows stakeholders to make informed decisions based on the accurate representation of the company's financial position.