Durocher Guitar Corp. is in the business of manufacturing top-quality, steel-string folk guitars. Durocher is a private enterprise and follows ASPE. In recent years, the company has experienced working capital problems resulting from investments in new factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a mortgage on one of its manufacturing plants. The founder and president of the company, Laraine Durocher, has tried to raise cash from various financial institutions, but she has been unsuccessful because of the company’s poor performance recently. In particular, the company’s lead bank, First Provincial, is especially concerned about Durocher’s inability to maintain a positive cash position. The commercial loan officer from First Provincial told Laraine Durocher, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.”

Thinking about the banker’s comment, Laraine Durocher came up with what she believes is a good plan: with a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors, liquidate its raw material inventories, and arrange a sale and leaseback for major components of its equipment. These rather costly transactions would generate lots of cash. It is your job, as the company’s ethical accountant, to advise Laraine Durocher on this plan.

Instructions
(a) Explain how each of these “solutions” would affect Durocher Guitar Corp.’s statement of cash flows. Be specific.
(b) What are the ethical issues related to Laraine Durocher’s idea?
(c) What would you advise Laraine Durocher to do?