Mega Enterprises is in the process of negotiating an extension of its existing loan agreements with a major bank. The bank is particularly concerned with Mega’s ability to generate sufficient cash flow from operating activities to meet the periodic principal and interest payments. In conjunction with the negotiations, the controller prepared the following statement of cash flows to present to the bank:
Mega Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2017
(all amounts in millions of dollars)
During 2017, Mega sold one of its businesses in California. A gain of $150 million was included in 2017 income as the difference between the proceeds from the sale of $450 million and the book value of the business of $300 million. The effect of the sale can be identified and analyzed as follows (in millions of dollars):
As assistant controller, one of your assignments is to review the financial statements prior to their release. When you ask your boss for an explanation of the way in which the sale of the business was reported on the statement of cash flows, he explains that ‘‘the gain is correctly included in net income and that is all that matters.’’
Required
Use the Ethical Decision Framework in Exhibit 1-9 to complete the following requirements:
1. Recognize an ethical dilemma: What ethical dilemma(s) do you face? Do you agree with the way in which the controller treated the sale of the business on the statement of cash flows? Explain why you agree or disagree.
2. Analyze the key elements in the situation:
a. Who may benefit if the sale of the business is reported on the statement of cash flows in the manner the controller insists it be reported? Who may be harmed?
b. How are they likely to benefit or be harmed?
c. What rights or claims may be violated?
d. What specific interests are in conflict?
e. What are your responsibilities and obligations?
3. List alternatives and evaluate the impact of each on those affected: As assistant control-ler, what are your options in dealing with the ethical dilemma(s) you identified in (1) above? If the sale of the business is reported on the statement of cash flows as the controller insists,will users have reliable information needed to make decisions? Why or why not?
4. Select the best alternative: Among the alternatives, which one would you select?
