Question
Wisconsin Farms is a wholesaler of agricultural supplies. It has stockholders who have been paid a total of one million dollars in cash dividends for
Wisconsin Farms is a wholesaler of agricultural supplies. It has stockholders who have been paid a total of one million dollars in cash dividends for seven consecutive years. It has a board policy that requires that in order for this dividend to be declared, net cash provided by operating activities as reported in Wisconsin Farms' cash flow statement must exceed one million dollars. President and CEO Dwight Schruten's job is secure so long as he produces annual operating cash flows to support this dividend. At the end of the current year, controller Bigus Tuna presents Dwight Schruten with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Bigus, "We must get amount above one million. Isnt there some way to increase operating cash flow by another $30,000?" Bigus answers, "These figures were prepared by my assistant. Ill go back to my office and see what I can do." The president replies, "I know you wont let me down, Bigus." Upon close scrutiny of the statement of cash flows, Mr. Tuna concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, two-year note payable listed in the financing activities section as "Proceeds from bank loan - $60,000." He will report the note instead as an "Increase in payables-$60,000" and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, "You can tell the board to declare their usual dividend. Our net cash flow provided by operating activities is $1,030,000." "Good man, Bigus! I knew I could count on you," exults the president. Address the following questions: Who are the stakeholders in this situation? Was there anything unethical about the presidents actions? Was there anything unethical about the controllers actions? Are the board members or anyone else likely to discover the misclassification?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started