Hello, I'm trying to understand this question in my accountingbook properly. The question is Ethics Case 21-7 in IntermediateAccounting 6th editon Spiceland, Sepe & Nelson 2011

After graduating near the top of his class, Ben Naegle was hiredby the local office of a Big 4 CPA firm in his hometown. Two yearslater, impressed with his technical skills and experience, ParkElectronics, a large regional consumer electronics chain, hired Benas assistant controller. This was last week. Now Ben's initialexcitement has turned to distress. The cause of Bens distress isthe set of financial statements he's stared at for the last fourhours. For some time prior to his recruitment, he has been aware ofthe long trend of moderate profitability of his new employer. Thereports on his desk confirm the slight, but steady, improvements innet income in recent years. The trend he was just now becomingaware of, though, was the decline in cash flows from operations.Ben had sketched out the following comparison ($ in millions):

2011 2010 2009 2008

Income from operations $140.0 132.0 127.5 127.0

Net income 38.5 35 34.5 29.5

Cash flow from operations 1.6 17.0 12.0 15.5

Profits? Yes. Increasing profits? Yes. The cause of hisdistress? The ominous trend in cash flow which is consistentlylower than net income.

Upon closer review, Ben noticed three events in the last twoyears that, unfortunately, seemed related:

1. Parks credit policy had been loosened; credit terms wererelaxed and payment periods were lengthened

2. Accounts receivable balances had increased dramatically

3. Several of the company's compensation arrangements, includingthat of the controller and the company president, were based onreported net income.

Required:

1. What is so ominous about the combination of events Bensees?

2. What course of action, if any, should Ben take?

 

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