Holman Electronics manufactures audio equipment, selling it through various distributors. Holman’s days sales outstanding (Accounts receivable / Average daily credit sales) figures increased steadily in 2014 and then spiked dramatically in 2015, peaking at 120 days in the second quarter. In the third quarter of 2015, Holman’s days sales outstanding figure dropped to 90 days. Its chief financial officer engineered this drop by artificially reducing the amount of outstanding accounts receivable. Channel partners with large outstanding receivables were pressured into signing notes for those amounts. Once sales personnel secured the notes, the CFO directed a reclassification entry to the general ledger converting more than $30 million in trade receivables into notes receivable, which are not included in the days sales outstanding calculation. This reclassification was not disclosed in the Form 10-Q that Holman filed for that quarter.

What might be the motive for the CFO’s actions? Explain your answer.

  • CreatedSeptember 10, 2014
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