Assume you serve on the board of a local golf and country club.In preparation for renegotiating the clubâs bank loans, thepresident indicates that the club needs to increase its operatingcash flows before the end of the current year. The clubâs treasurerreassures the president and other board members that he knows acouple of ways to boost the clubâs operating cash flows. First, hesays, the club can sell some of its accounts receivable to acollections company that is willing to pay the club $97,000 upfront for the right to collect $1 00,000 of the overdue accounts.That will immediately boost operating cash flows. Second, heindicates that the club paid about $200,000 last month to relocatethe 18th fairway and green closer to the clubhouse. The treasurerindicates that although these costs have been reported as expensesin the clubâs own monthly financial statements, he feels anargument can be made for reporting them as part of land and landimprovements (a long-lived asset) in the year-end financialstatements that would be provided to the bank. He explains that, byrecording these payments as an addition to a long-lived asset, theywill not be shown as a reduction in operating cash flows.
Required:
1. Does the sale of accounts receivable to generate immediatecash harm or mislead anyone? Would you consider it an ethicalbusiness activity?
2. What category in the statement of cash flows is used whenreporting cash spent on long-lived assets, such as landimprovements? What category is used when cash is spent on expenses,such as costs for regular upkeep of the grounds?
3. What facts are relevant to deciding whether the costs of the18th hole relocation should be reported as an asset or as anexpense? Is it appropriate to make this decision based on theimpact it could have on operating cash flows?
4. As a member of the board, how would you ensure that anethical decision is made?
Assume you serve on the board of a local golf and country club.In preparation for renegotiating the clubâs bank loans, thepresident indicates that the club needs to increase its operatingcash flows before the end of the current year. The clubâs treasurerreassures the president and other board members that he knows acouple of ways to boost the clubâs operating cash flows. First, hesays, the club can sell some of its accounts receivable to acollections company that is willing to pay the club $97,000 upfront for the right to collect $1 00,000 of the overdue accounts.That will immediately boost operating cash flows. Second, heindicates that the club paid about $200,000 last month to relocatethe 18th fairway and green closer to the clubhouse. The treasurerindicates that although these costs have been reported as expensesin the clubâs own monthly financial statements, he feels anargument can be made for reporting them as part of land and landimprovements (a long-lived asset) in the year-end financialstatements that would be provided to the bank. He explains that, byrecording these payments as an addition to a long-lived asset, theywill not be shown as a reduction in operating cash flows.
Required:
1. Does the sale of accounts receivable to generate immediatecash harm or mislead anyone? Would you consider it an ethicalbusiness activity?
2. What category in the statement of cash flows is used whenreporting cash spent on long-lived assets, such as landimprovements? What category is used when cash is spent on expenses,such as costs for regular upkeep of the grounds?
3. What facts are relevant to deciding whether the costs of the18th hole relocation should be reported as an asset or as anexpense? Is it appropriate to make this decision based on theimpact it could have on operating cash flows?
4. As a member of the board, how would you ensure that anethical decision is made?
