Assume you serve on the board of a localgolf and country club. In preparation for renegotiating theclub%u2019s bank loans, the president indicates that the club needsto increase its operating cash flows before the end of the currentyear. The club%u2019s treasurer reassures the president and otherboard members that he knows a couple of ways to boost theclub%u2019s operating cash flows. First, he says, the club can sellsome of its accounts receivable to a collections company that iswilling to pay the club $97,000 up front for the right to collect$1 00,000 of the overdue accounts. That will immediately boostoperating cash flows. Second, he indicates that the club paid about$200,000 last month to relocate the 18th fairway and green closerto the clubhouse. The treasurer indicates that although these costshave been reported as expenses in the club%u2019s own monthlyfinancial statements, he feels an argument can be made forreporting them as part of land and land improvements (a long-livedasset) in the year-end financial statements that would be providedto the bank. He explains that, by recording these payments as anaddition to a long-lived asset, they will not be shown as areduction in operating cash flows.
Required:
1. Does the sale of accounts receivable togenerate immediate cash harm or mislead anyone? Would you considerit an ethical business 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 decidingwhether the costs of the 18th hole relocation should be reported asan asset or as an expense? Is it appropriate to make this decisionbased on the impact 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 localgolf and country club. In preparation for renegotiating theclub%u2019s bank loans, the president indicates that the club needsto increase its operating cash flows before the end of the currentyear. The club%u2019s treasurer reassures the president and otherboard members that he knows a couple of ways to boost theclub%u2019s operating cash flows. First, he says, the club can sellsome of its accounts receivable to a collections company that iswilling to pay the club $97,000 up front for the right to collect$1 00,000 of the overdue accounts. That will immediately boostoperating cash flows. Second, he indicates that the club paid about$200,000 last month to relocate the 18th fairway and green closerto the clubhouse. The treasurer indicates that although these costshave been reported as expenses in the club%u2019s own monthlyfinancial statements, he feels an argument can be made forreporting them as part of land and land improvements (a long-livedasset) in the year-end financial statements that would be providedto the bank. He explains that, by recording these payments as anaddition to a long-lived asset, they will not be shown as areduction in operating cash flows.
Required:
1. Does the sale of accounts receivable togenerate immediate cash harm or mislead anyone? Would you considerit an ethical business 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 decidingwhether the costs of the 18th hole relocation should be reported asan asset or as an expense? Is it appropriate to make this decisionbased on the impact it could have on operating cash flows?
4. As a member of the board, how would you ensure that anethical decision is made?
