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Homework answers / question archive / Steadyflow Ltd is a wholesaler of automotive parts
Steadyflow Ltd is a wholesaler of automotive parts. It has shareholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board of directors’ policy requires that in order for this dividend to be declared, net cash provided by operating activities as reported in Steadyflow Ltd’s statement of cash flows must exceed $1 million. The managing director’s job is secure so long as she produces annual operating cash flows to support the usual dividend.
At the end of the current year, the accountant reports some disappointing news. The net cash provided by operating activities is calculated as only $970 000. The managing director says, ‘We must get that amount above $1 million. Isn’t there some way to increase operating cash flow by another $30 000?’ The accountant replies, ‘I’ll go back to my office and see what I can do.’ The managing director replies, ‘I know you won’t let me down.’
On close scrutiny of the statement of cash flows, the accountant concludes that he can get the operating cash flows above $1 million by reclassifying a $60 000, 2-year note payable listed in the financing activities section as ‘proceeds from bank loan-$60 000’. He then adds the 2-year note to accounts payable, thus reducing the net payment of accounts payable. He returns to the managing director, saying, ‘You can tell the board to declare their usual dividend. Our net cash flow provided by operating activities is $1 030 000.’ ‘I knew I could count on you,’ exults the managing director.
(a) What are the ethical issues in this case?
(b) Identify key stakeholders and discuss how they are impacted by this situation.
(c) Recommend a course of action for the accountant.
(a) The Ethical issues in this case for an accountant is to Conflict with Interest as an Employee. As per professional duty towards shareholders is to provide with them the correct and accurate results as they make their decisions based upon the figures of Financial Statements and other duty is towards Managing Director as an employee to support the senior in case of need.
(b) Main user affected by the decision is Shareholders as they need to take decisions on further investment and/or to assess the management operations is from financial particulars. Especially in the given case where Cash Dividend will be paid to the shareholders even if the company has not satisfied with its financial performance. Also it will provide wrong information to other stakeholders also like creditors will give extra time for payment since its Operating Cash Flow is Good.
(c) The Accountant can suggest Managing Director about the misled decisions by the stakeholders if they provide a wrong output and it will also affect the their careers as professionals in future. However they may disclose the modified net operating cash flow disclosing it is just to show the net operating cash flow if we have followed another accounting policy or by simply disclosing it in notes if it is not seriously affecting.
