Lindsey Contractors' borrowing agreements make certain demandson the business. Lindsey's Long-Term Debt may not exceedStockholder's Equity, and the current ratio may not fall below1.50. If Lindsey fails to meet this requirement, the company'slenders 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 releasingfinancial statements, Lindsey management is scrambling to improvethe current ratio. Th controller points out that an investment canbe classified as either long-term or short-term, depending onmanagement's intention. By deciding to convert an investment tocash within one year, Lindsey can classify the investment asshort-term - a current asset. On the controller's recommendation,Lindsey's board of directors votes to reclassify long-terminvestments as short-term.
1. Do you think that the actions taken by Lindsey's controller andboard of directors are ethical. Why or why not?
2. Shortly after the financial statements are released, salesimprove and so does the current ratio. As a result, Lindseymanagement decides not o sell the investments it had reclassifiedas short-term. Accordingly, Lindsey reclassifies the investments aslong-term. Has management behaved unethically? Why or why not?
