Brockman Guitar Company is in the business of manufacturing top-quality, steelstring folk guitars. In recent years the company has experienced working capital
problems resulting from the procurement of factory equipment, the unanticipated
buildup of receivables and inventories, and the payoff of a balloon mortgage on a
new manufacturing facility. The founder and president of the company, Barbara
Brockman, has attempted to raise cash from various financial institutions, but to
no avail because of the company’s poor performance in recent years. In
particular, the company’s lead bank, First Financial, is especially concerned
about Brockman’s inability to maintain a positive cash position. The commercial
loan officer from First Financial told Barbara, "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, Barbara
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 and liquidate its raw materials inventories. These rather costly
transactions would generate lots of cash. As the chief accountant for Brockman
Guitar, it is your job to tell Barbara what you think of her plan. Answer the
following questions.
(a) What are the ethical issues related to Barbara Brockman’s idea?
(b) What would you tell Barbara Brockman?

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