Rossâs Lipstick Companyâs long-term debt agreements make certaindemands on the business. For example, Ross may not purchasetreasury stock in excess of the balance of retained earnings. Also,long-term debt may not exceed stockholdersâ equity, and the currentratio may not fall below 1.50. If Ross fails to meet any of theserequirements, the companyâs lenders have the authority to take overmanagement of the company. Changes in consumer demand have made ithard for Ross to attract customers Current liabilities have mountedfaster than current assets, causing the current ratio to fall to1.47. Before releasing financial statements, Rossâs management isscrambling to improve the current ratio. The controller points outthat an investment can be classified as either long-term orshort-term, depending on managementâs intention. By deciding toconvert an investment to cash within one year, Ross can classifythe investment as short-term-a current asset. On the controllerâsrecommendation, Rossâs board of directors votes to reclassifylong-term investments as short-term.
Requirements
What effect will reclassifying the investments have on thecurrent ratio? Is Ross's true financial position stronger as aresult of reclassifying the investments?
Shortly after the financial statements are released, salesimprove; so, too, does the current ratio. As a result, Ross'smanagement decides not to sell the investments it had reclassifiedas short-term. Accordingly, the company reclassifies theinvestments as long-term. Has management behaved unethically? Givethe reasoning underlying your answer.
Your written assignment should be a minimum of two pages and amaximum of four pages, typed double spaced, Times New Roman fontsize 12, with one inch margins on all sides.
Rossâs Lipstick Companyâs long-term debt agreements make certaindemands on the business. For example, Ross may not purchasetreasury stock in excess of the balance of retained earnings. Also,long-term debt may not exceed stockholdersâ equity, and the currentratio may not fall below 1.50. If Ross fails to meet any of theserequirements, the companyâs lenders have the authority to take overmanagement of the company. Changes in consumer demand have made ithard for Ross to attract customers Current liabilities have mountedfaster than current assets, causing the current ratio to fall to1.47. Before releasing financial statements, Rossâs management isscrambling to improve the current ratio. The controller points outthat an investment can be classified as either long-term orshort-term, depending on managementâs intention. By deciding toconvert an investment to cash within one year, Ross can classifythe investment as short-term-a current asset. On the controllerâsrecommendation, Rossâs board of directors votes to reclassifylong-term investments as short-term.
Requirements
What effect will reclassifying the investments have on thecurrent ratio? Is Ross's true financial position stronger as aresult of reclassifying the investments?
Shortly after the financial statements are released, salesimprove; so, too, does the current ratio. As a result, Ross'smanagement decides not to sell the investments it had reclassifiedas short-term. Accordingly, the company reclassifies theinvestments as long-term. Has management behaved unethically? Givethe reasoning underlying your answer.
Your written assignment should be a minimum of two pages and amaximum of four pages, typed double spaced, Times New Roman fontsize 12, with one inch margins on all sides.
