Eurocheapo Travel Ltd. is experiencing a bad year. Net income is only $60,000. Also, two important clients are falling behind in their payments to Eurocheapo Travel Ltd., and the agency's accounts receivable are increasing dramatically. The company desperately needs a loan. The company's board of directors is considering ways to put the best face on the company's financial statements. The company's bank closely examines cash flow from operations. Trent Belland, a director, suggests reclassifying as long term the receivables from the slow-paying clients. He explains to the other members of the board that removing the $40,000 rise in accounts receivable will increase net cash inflow from operations. This approach will increase the company's cash balance and may help Eurocheapo Travel Ltd. get the loan.
Required
1. Using only the amounts given, compute net cash inflow from operations both without and with the reclassification of the receivables. Which reporting makes Eurocheapo Travel Ltd. look better?
2. Where else in Eurocheapo's cash flow statement will the reclassification of the receivable be reported? What cash flow effect will this item report? What effect would the reclassification have on overall cash flow from all activities?
3. Under what condition would the reclassification of the receivables be ethical? Unethical?