Jimmy, Matt and Andy are business partners who own Jimmy Matt Andy's Beach Wear. Jimmy Matt Andy's arrangement with all of its clothing suppliers allows it to pay for its merchandise purchases one month after the purchases have been made. About 15 per cent of their customers make purchases on credit. These customers pay for their purchases one month after they have made their purchases. All the partners agree that a bank loan would allow Jimmy Matt Andy's to revamp the shopfront (perhaps causing more customers to want to come inside and shop). The partners are having a disagreement, however, about the cash budget that they plan to include in their loan application package. Jimmy and Andy believe that the budget should be revised to present the bank with the most positive projected cash flows. To accomplish this revision, they are suggesting that on the cash budget, payments for purchases be shown two months after the purchases have been made, rather than one month as agreed to by Jimmy Matt Andy's suppliers. Jimmy and Andy are also suggesting that cash receipts from credit customers be budgeted in the same month as the related sales rather than one month later, even though they expect these customers to wait a month before paying for their purchases. Matt thinks the budget should reflect the partners' actual expectations. The partners have come to you for advice.

Required:

a What ethical issues are involved in this decision?

b If the partners make the revisions, what effect will the revisions have on the sales budget? On the purchases budget? On the cash budget?

c Who stands to gain and who stands to lose by this budget revision? Is the gain or loss temporary or permanent, short term or long term?

d How might the bank be hurt by the changed budget? How might the business be hurt by the changed budget?

e Since the budget represents a plan of action, how might the changed budget affect the activities of the business during the budget period?

f Are there other alternatives to choose from besides changing the budget or not changing the budget?
g What do you recommend that the partners do?