Assume you serve on the board of a local golf and country club. In preparation f

Question

Assume you serve on the board of a local golf and country club. In preparation for renegotiating the club%u2019s bank loans, the president indicates that the club needs to increase its operating cash flows before the end of the current year. The club%u2019s treasurer reassures the president and other board members that he knows a couple of ways to boost the club%u2019s 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%u2019s 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?

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?

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?

4. As a member of the board, how would you ensure that an ethical decision is made?

Explanation / Answer

1. Operating cashflow including the changes of account receivable from previous year. Therefore by selling receivables, it will bring positive figure to operating cashflow. It can be mislead as decreasing in account receivable in balance sheet indicates improvement in operations. At here, goldclub has no changes on operations efficienct and need to record 3,000 on bad debt expenses( 100,000 of assets sold for 97,000, the rest of 3,000 recorded as expenses).

2. Cash flows are classified as operating cashflow, investing cashflow, and financial cashflow. If the cash spent is categorized as assets, it will be classified as investing cashflow. If the cash is spent on expenses, it will be categorized under operating cash flow. Therefore, by turning one expense into asset, it will eventually improve operating cashflow.

3. Assets are resources and able to produce value for owners. Glofclub already have 18th hole buily for members before relocation. Now, the club decide to change location for the 18th hole. The value of the asset will not increase because of you have relocate one of the hole. Therefore, it should be recognized as expenses.

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