Joe, Billy, Ray and Bob are business partners who own Joe Billy Ray Bob's Country and Western Wear. Joe Billy Ray Bob's arrangement with all of its clothing suppliers allows it to pay for its merchandise purchases one month after the purchases have been made. About 15% of their customers make purchases on credit. These customers pay for their purchases one month after they have made their purchases. All the partners agree that a bank loan would allow Joe Billy Ray Bob's to revamp the storefront (perhaps causing more customers to want to come inside the shop). The partners are having a disagreement, however, about the cash budget that they plan to include in their loan application package. Joe Billy Ray and Bob believe that the budget should be revised to present the bank with the most positive projected cash flows. To accomplish this revision, they are suggesting that on the cash budget, payments for purchases be shown two months after the purchases have been made, rather than one month as agreed to by Joe Billy Ray and Bob's suppliers. Joe, Billy, and Bob are also suggesting that cash receipts from credit customers be budgeted in the same month as the related sales rather than one month later, even though they expect these customers to wait a month before paying for their purchases. Ray thinks the budget should reflect the partners' actual expectations. The partners have come to you for advice.
Required:
1. What ethical issues are involved in the decision?
2. If the partners make the revisions, what effect will the revisions have on the sales budget? On the cash budget?
3. Who stands to gain and who stands to lose by this budget revision? Is the gain or loss temporary or permanent or long-term?
4. How might the bank be hurt by the changed budget? How might the company be hurt by the changed budget?
5. Since the budget represents a plan of action, how might the changed budget affect the activities of the company during the budget period?
6. Are there other alternatives to choose from besides changing the budget or not changing the budget?
7. What do you recommend that the partners do?