Karl Murphy is preparing for a meeting with his banker. His business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. Inventory costs, however, rose significantly in year four, and cash flow from operations will probably be down 25%. Murphy wants to secure a line of credit from his banker as a financing buffer. From experience, he knows the banker will scrutinize operating cash flows for years one to four and will want a projected number for year five. Murphy knows that a steady progression upward in operating cash flows for years one through four will help his case. He decides to use his discretion as the owner of the business and considers several business actions that will turn his operating cash flow in year four from a decrease to an increase.
Discuss two actions Murphy might take to improve cash flow from operations.
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Then, comment on the possible consequences of Murphy’s decision to pursue these two actions.
Are they within U.S. GAAP? Are they ethical? Why or why not?
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