[ashleynwo]

Recent years the company has experience working capital problems resulting from the procument of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a ballon mortgage on a new manufactoring facilty. Barabra attempted to raise cash from various financial institutions, but to no avail because of the company's poor performance in recent years. Barabra came up with a plan: with a more attractive statement of cash flow, the bank might be willing to provide long-term financing. To "window dress" cash flow, the company can sell its accounts receivables to factors and liquidate its raw materiels inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell what you think of her plan

[haider78605]

As different option of financing is available, one has to choose among those depending its cost, if the cost of factoring is lower than bank borrowing then it is preferable otherwise she should go for bank loan

[rehmanvohra]

Recent years the company has experience working capital problems resulting from the procument of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a ballon mortgage on a new manufactoring facilty. Barabra attempted to raise cash from various financial institutions, but to no avail because of the company's poor performance in recent years. Barabra came up with a plan: with a more attractive statement of cash flow, the bank might be willing to provide long-term financing. To "window dress" cash flow, the company can sell its accounts receivables to factors and liquidate its raw materiels inventories. These rather costly transactions would generate lots of cash. as the chief accountant for Brockman Guitar, it is your job to tell what you think of her plan

As an accountant with or wthout professional qualification, the plan is unethical:

1. Window dressing or creative accounting as it is now called, makes an attempt to make the financial statements unreliable since you will be influencing the decision of the banker to provide you with a loan.

2. Receivable factoring will be just a book entry as per plan. The bank will smell a rat when the factored receivables are not realized and force immediate repayment of loan. Even if it is presented as planned, the effect will be to increase cash balance to the extent of factored financing less upfront fee. There will be small change in the total current assets.

3. Liquidating inventories would reduce inventories, increase cash and reduce equity since liquidation prices are usually smaller that the normal selling prices.

When the banker sees that there is sufficient cash available, he might have some thoughts about the window dressing.

To sum it up. It is not advisable and if I were the accountant, I would simply quit the job if the boss insists on putting her plans in action.