what effect will reclassifying the investments have on the current ratio is ross s 381377

Rosss Lipstick Companys long term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long term debt may not exceed stockholderss equity, and the current ration may not fall below 1.50. If Ross fails to meet any of these requirements, the companys lenders have the authority to take over management of the company.

Changes in consumer demand have made it hard for Ross to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall 1.47. Before releasing financial statements, Rosss management is scrambling to improve the current ratio. The controller points that an investment can be classified as either long term or short term, depending on managements intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short term a current asset. On the controllers recommendation, Rosss board of directors votes to reclassify long term investments as short term.

Requirements

What effect will reclassifying the investments have on the current ratio? Is Rosss true financial position stronger as a result of reclassifying the investments?

Shortly after the financial statements are released, sales improve; too, does the current ratio. As a result, Rosss management decides not to sell the investments it had reclassified as short term. Accordingly, the company reclassifies the investments as long term. Has management behaved unethically? Give the reasoning underlying your answer.