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Babbit Corp. is a medium sized wholesaler




Question;Babbit;Corp. is a medium sized wholesaler of automotive parts. It has ten;stockholders who have been paid a total of $1 million in cash dividends;for 8 consecutive years. That board?s policy requires that, for this;dividend to be declared, net cash provided by operating activities as;reported in Babbit?s current year?s statement of cash flows must exceed;$1 million. President and CEO Milton Williams?s job is secure so long as;he produces annual operating cash flows to support the usual dividend.At;the end of the current year, controller Jerry Roberts presents;president Milton Williams with some disappointing news: The net cash;provided by operating activities is calculated by the indirect method to;be only $970,000. The president says to Jerry, "We must get amount;above $1 million. Isn?t there some way to increase operating cash flow;by another $30,000?" Jerry answers, "These figures were prepared by my;assistant. I?ll go back to my office and see what I can do." The;president replies, "I know you won?t let me down, Jerry."Upon;close scrutiny of the statement of cash flows, Jerry 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 will report the note instead;as "Increase in payables-$60,000" and treat it as an adjustment of net;income in the operating activities section. He returns to the president;saying, "You can tell the board to declare their usual dividend. Our;net cash flow provided by operating activities is $1,030,000." "Good;man, Jerry! I knew I could count on you," exults the president.Address the following questions:Who are the stakeholders in this situation?Was there anything unethical about the president?s actions? Was there anything unethical about the controller?s actions?Are the board members or anyone else likely to discover the misclassification??(Weygandt, Kimmel, & Kieso, 2012).


Paper#40184 | Written in 18-Jul-2015

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