Reference no: EM132009633

Question - Maxine Flynn is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were increasingly positive. However, inventory costs rose significantly in year 4, and cash flows from operations will probably be down 25%.
Flynn wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for years 1 through 4. Flynn knows that a steady progression upward in operating cash flows for years 1 through 4 will help her case.

She decides to use her discretion as owner and concludes that she can get the year 4 operating cash flows to show a positive increase by reclassifying a $60,000, 2-year note payable currently listed in the Financing Activities section as "Proceeds from bank loan-$60,000." She tells her accountant to report the note instead as "Increase in payables-$60,000" and treat it as an adjustment of net income in the Operating Activities section, which will turn her operating cash flow in year 4 from a decrease to an increase.

1. Who might be affected by the suggested reclassification?

2. Comment on the ethics of Flynn's request.

3. Assume the accountant decides to make the change that Flynn requests, comment on the ethics of the accountant's decision to make the change.

4. What are the possible consequences to the Statement of Cash Flows of the decision to make the changes?