Wendy Geiger is working late on a Friday night in preparation for a meeting with her banker early Monday morning. Her business is just finishing its fourth year. In Year 1, the business experienced negative cash flows from operations. In Years 2 and 3, cash flows from operations turned positive. Unfortunately, her inventory costs rose significantly in Year 4 and her net income will probably be down about 25% after this year’s adjusting entries. Wendy is hoping to secure a line of credit from her banker, which will be a nice financing buffer. From prior experience with her banker, she knows that a focus of Monday’s meeting will be cash flows from operations. The banker will scrutinize the cash flow numbers for Years 1 through 4 and will want a projected number for Year 5. Wendy knows that a steady upward progression of cash flows in Years 1 through 4 will really help her case for securing the line of credit. Wendy decides to use her discretion as owner of the business and proposes several adjusting entries and business actions that will help turn her cash flow number in Year 4 from negative to positive.
1. Identify two possible entries or business actions Wendy might use to improve the cash flow from operations number on the statement of cash flows for Year 4.
2. Comment on the ethics and possible consequences of Wendy’s decision to propose the adjustments/actions for Year 4.