Essay: Ross’s Financial Position and Investment Reclassification

Ross’s Lipstick Company’s 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 stockholders’ equity, and the current ratio may not fall below 1.50. If Ross 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 Ross to attract customers Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The 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, Ross can classify the investment as short-term-a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term. Requirements 1 What effect will reclassifying the investments have on the current ratio? Is Ross's true financial position stronger as a result of reclassifying the investments? 2 Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross's 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. You will complete and submit your short, written assignment using Microsoft Word. Your assignment should be professionally written, using APA style to document resources. Your written assignment should be a minimum of two pages and a maximum of four pages, typed double spaced, Times New Roman font size 12, with one inch margins on all sides.

Accounting method for current liabilities

The liability side of the balance sheet of any company are divided into non-current liabilities and current liabilities. The current liabilities are those obligations that are payable within the period of one year and will be paid off through the available current liabilities. If the investment of Ross’s Lipstick Company is reclassified as current asset from the non-current asset, then the current ratio of the company will increase, which in turn will improve current ratio position of the company (Weil, Schipper & Francis, 2013). For instance, if the current asset of the company is $100,000 and the current liabilities are $ 50,000, then the current ratio will be $100,000/$50,000 = 2. Due to reclassification of investment, the current assets will become $125,000 and the current ratio then will be $125,000/$50,000 = 2.5. Therefore, the true financial position of the company will become stronger owing to the reclassification of investment from non-current asset to current asset.

Financing of the operation through the long-term liabilities

Long-term liabilities of any company are the obligations that are to be paid beyond the operating cycle or one year period. The long-term obligations include debt such as bonds. Bonds are the debts generally issued to the investor group or to the public. It allows the holders of the bond to redeem for the common shares or the bond which are issues in association with the warrants to buy the stock (Pollard, 2015). Bonds has its own advantages as compared to stocks