Greensboro Golf Corporation’s long-term debt agreements make certain demands on the business. For example, Greensboro may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Greensboro fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.
Changes in consumer demand have made it hard for Greensboro to attract customers. The company’s current liabilities have grown faster than its current assets, causing the current ratio to fall to 1.47. Before releasing managers are scrambling to improve the current ratio. The controller points out that the company owns an investment that is currently classified as long-term. The investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Greensboro can classify the investment as short-term—a current asset. On the controller’s recommendation, Greensboro’s board of directors votes to reclassify long-term investments as short-term.
Requirements
1. What is the accounting issue in this case? What ethical decision needs to be made?
2. Who are the ?
3. Analyze the potential impact on the from the following standpoints:
(a) Economic,
(b) Legal,
(c) Ethical.
4. Shortly after the are released, sales improve; so, too, does the current ratio. As a result, Greensboro management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassifies the investments as long-term. Has management acted unethically? Give the reason for your answer.
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