(Cash Flow Reporting) Brockman Guitar Company is in the business

of manufacturing top-quality, steel-string folk guitars. In recent years, the company has experienced

working capital problems resulting from the procurement of factory equipment, the unanticipated

buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing

facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from

various fInancial institutions, but to no avail because of the companys poor performance in recent years.

In particular, the companys lead bank, First Financial, is especially concerned about Brockmans inability

to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, I

cant even consider your request for capital fInancing unless I see that your company is able to generate

positive cash flows from operations.

Thinking about the bankers comment, Barbara came up with what she believes is a good plan: With

a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To

window dress cash flows, the company can sell its accounts receivables to factors and liquidate its raw

materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant

for Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

a. What are the ethical issues related to Barbara Brockmans idea?

b. What would you tell Barbara- - Brockman?