Brickman Corporation is a medium-sized wholesaler of building materials in the state of NSW. Its shareholders have been paid a total of $1 million in cash dividends for the last 8 consecutive years. The policy of the Board of Directors requires that in order for this dividend to be declared, net cash provided by operating activities in Brickman’s current year’s Statement of Cash Flows must be in excess of $1 million. CEO Phil Lucky’s job is secure so long as he produces annual operating cash flows to support the usual dividend. At the end of the current year, financial controller Jack Black presents CEO Lucky with some disappointing news: the net cash provided by operating activities is calculated to be only $970,000. The CEO says to Jack, “We must get that amount above $1 million. Aren’t there some ways to increase operating cash flows by another $30,000?” Jack answers, “These figures were prepared by my assistant. I’ll go back to my office and see what I can do.” The CEO replies, “I know you won’t let me down, Jack.” After scrutinising the Statement of Cash Flows, Jack concludes that he can get the operating cash flows above $1 million by including a $60,000, 2-year Notes borrowed during the current year as part of the company’s Accrued Expenses account, rather than as part of the Notes Payable account. He returns to the CEO saying, “You can tell the Board to declare their usual dividend. Our net cash flow provided by operating activities is now $1,030,000.” “Good man, Jack! I knew I could count on you,” exults the CEO.

Explain why Jack thinks the reclassification of the $60,000, 2-year Notes Payable as Accrued Expenses can increase the net cash flow from operating activities. Use the concepts underlying: (i) the indirect method, and (ii) the direct method of calculating cash inflows and outflows from operating activities to support your answer.

Assuming that the usual $1 million cash dividends can be declared and paid at the end of the current year, what would be the subsequent impact of this reclassification on the company’s

(i) operating,

(ii) investing,

(iii) financing, and

(iv) total cash flows? State both the direction and size of the impact (4 marks).

Based on your answers above, do you agree with Jack’s suggestion to reclassify $60,000, 2-year Notes? (2 marks).