Question:
Assume you serve on the board
of a local golf and country club. In preparation for renegotiating the club’s
bank loans, the president indicates that the club needs to increase its
operating cash flows before the end of the current year. The club’s treasurer
reassures the president and other board members that he knows a couple of ways
to boost the club’s operating cash flows.
First, he says, the club can
sell some of its accounts receivable to a collections company that is willing
to pay the club $97,000 up front for the right to collect $1 00,000 of the
overdue accounts. That will immediately boost operating cash flows. Second, he
indicates that the club paid about $200,000 last month to relocate the 18th
fairway and green closer to the clubhouse.
The treasurer indicates that
although these costs have been reported as expenses in the club’s own monthly
financial statements, he feels an argument can be made for reporting them as
part of land and land improvements (a long-lived asset) in the year-end financial
statements that would be provided to the bank. He explains that, by recording
these payments as an addition to a long-lived asset, they will not be shown as
a reduction in operating cash flows.
Required:
1.
Does the sale of accounts
receivable to generate immediate cash harm or mislead anyone? Would you
consider it an ethical business activity?
a.
2.
What category in the statement
of cash flows is used when reporting cash spent on long-lived assets, such as
land improvements? What category is used when cash is spent on expenses, such
as costs for regular upkeep of the grounds?
a.
3.
What facts are relevant to
deciding whether the costs of the 18th hole relocation should be reported as an asset or as an expense?
Is it appropriate to make this decision based on the impact it could have on
operating cash flows?
a.
4. As a member of the board, how would you ensure that an ethical
decision is made?
No comments:
Post a Comment