Lindsey Contractors’ borrowing agreements make certain demands on the business. Lindsey’s Long-Term Debt may not exceed Stockholder’s Equity, and the current ratio may not fall below 1.50. If Lindsey fails to meet this requirement, the company’s lenders can take over management of the corporation.
Current Liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Lindsey management is scrambling to improve the current ratio. Th controller points out that an 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, Lindsey can classify the investment as short-term – a current asset. On the controller’s recommendation, Lindsey’s board of directors votes to reclassify long-term investments as short-term.
1. Do you think that the actions taken by Lindsey’s controller and board of directors are ethical. Why or why not?
2. Shortly after the financial statements are released, sales improve and so does the current ratio. As a result, Lindsey management decides not o sell the investements it had reclassified as short-term. Accordingly, Lindsey reclassifies the investments as long-term. Has management behaved unethically? Why or why not?