Suppose, at a party last weekend, your friend LaQuinta mentioned to you, in confidence, that her company was in the middle of a big scandal. It seems that the company needed a loan in order to enter into a top-secret marketing effort. In preparing the financial statements necessary for securing the loan, the company’s bookkeeper noticed that cash flows from operations had been declining over the past five years, although total cash flows had been increasing. Apparently afraid that the bank would turn down the company’s request for a loan if it saw the company’s decreasing trend in cash flows from operations, he decided to reclassify cash receipts from the sale of equipment as collections from customers.

Required: (1) What do you think the bookkeeper hoped to accomplish by making the reclassification?

(2) Who do you think might be affected by this decision, and how might they be affected?

(3) If you were the company’s owner, how would you have reacted to the bookkeeper’s “help”?  plo47