Columbia Motors is having a bad year. Net income is only $37,000. Also, two important overseas customers are falling behind in their payments to Columbia, and Columbia’s accounts receivable are ballooning. The company desperately needs a loan. The Columbia board of directors is considering ways to put the best face on the company’s financial statements. Columbia’s bank closely examines cash flow from operations. Daniel Peavey, Columbia’s controller, suggests reclassifying as long-term the receivables from the slow-paying clients. He explains to the board that removing the $80,000 rise in accounts receivable from current assets will increase net cash provided by operations.

This approach may help Columbia get the loan.

Requirements

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Columbia look better?

2. Identify the ethical issue(s).

3. Who are the stakeholders?

4. Analyze the issue from the

(a) Economic

(b) Legal

(c) Ethical standpoints.

What is the potential impact on all stakeholders?

5. What should the board do?

6. Under what conditions would the reclassification of the receivables be considered ethical?