Question

Michael Reinstein had just left the office of his supervisor, Scott Medley. The supervisor had mentioned that Michael should reclassify a cash receipt from issuance of long term notes payable as a short term notes payable. Scott had shared with Michael that the chairman of the Board of Directors was placing intense pressure on him to report a positive cash flow from operating activities. Michael knew that if the company reclassified the notes payable, the business would no longer report the receipts in the financing activities section of the statement of cash flows. It would be shown as an increase in current liabilities resulting in a positive cash flow from operating activities. What should Michael do?

Answer 1

Michael should not pay heed to the request of his supervisor and should not reclassify the cash receipt from issuance of a long term notes payable as a short term notes payable. Doing so will be both unethical as well as illegal.

This is because taking the above action of reclassifying the cash receipt from issuance of a long term notes payable as a short term notes payable will lead to financial statement manipulation and will violate the accounting principles of GAAP. Doing so will not give a true and fair picture of the financial position of the company and the users of the financial reports will be misled to think and believe that the company is generating positive cash flows from its operating activities while the truth is that the company is not doing so and in fact is cash flows from operating activities is negative.

Thus Michael should not do this reclassification and should report the matter to a senior manager of the organization like the finance manager or the CFO. In case the senior managers are also pressing for this reclassification then Michael should report the issue to relevant authorities.