Millinium Frozen Foods owes the bank $50,000 on a line of credit. Terms of the agreement specify

Question:

Millinium Frozen Foods owes the bank $50,000 on a line of credit. Terms of the agreement specify that Millinium must maintain a minimum current ratio of 1.2 to 1, or the entire outstanding balance becomes immediately due in full. To date, the company has complied with the minimum requirement. However, management has just learned that a failed warehouse freezer has ruined thousands of dollars of frozen foods inventory. If the company records this loss, its current ratio will drop to approximately 0.8 to 1.
Whether any or all of this loss may be covered by insurance currently is in dispute and will not be known for at least 90 days-perhaps much longer. There are several reasons why the insurance company may have no liability.
In trying to decide how to deal with the bank, management is considering the following options:
(1) Postpone recording the inventory loss until the dispute with the insurance company is resolved,
(2) Increase the current ratio to 1.2 to 1 by making a large purchase of inventory on account,
(3) Explain to the bank what has happened, and request that it be flexible until things get back to normal.
Instructions
a. Given that the Millinium's management expects at least partial reimbursement from the insurance company, is it really unethical for management to postpone recording the inventory loss in the financial statements it submits to the bank?
b. Is it possible to increase the Millinium's current ratio from 0.8 to 1 to 1.2 to 1 by purchasing more inventory on account? Explain.
c. What approach do you think Millinium management should follow in dealing with the bank?
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial and Managerial Accounting the basis for business decisions

ISBN: 978-0078025778

17th edition

Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello

Question Posted: