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Design Incorporated experienced a downturn in December sales. To make matters worse, many recent sales were on account; because many customers were not paying on their accounts, the ending balance of Accounts Receivable at December 31 was higher than the beginning balance. Because the business had a dramatic need for cash, a prime piece of land owned by the company was sold for cash in December, at a substantial gain. Design Incorporated had purchased the land 10 years earlier and properly classified it as a long-term investment. The CEO, Jim Shady, was looking over the financial statements and saw the company's weak operating cash flows. He approached the accountant to ask why the December cash flows pro-vided from operations were so weak, given that the land had been sold. The accountant explained that because the indirect method was used in preparing the cash flow statement, certain adjust-ments to net income were required. To begin with, the increase in accounts receivable was a decreasing adjustment made in arriving at the net cash provided from operating activities. Next, the large gain recognized on the sale of land had to be adjusted by subtracting it from the net income in arriving at the cash provided by operating activities.
Problem 1: Why didn't Jim want the accountant to decrease the net income by the increase in accounts receivable and the gain on the land sale? Why do you think Jim fnally agreed with the accountant?
Problem 2: Could the operating cash fows be increased by including the cash proceeds from the sale but listing them as "other" rather than as land sale proceeds? What ethi-cal concerns are involved? Do you have any other thoughts?
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