J's Wedding Productions wants to expand. Suppose the company borrows $200,000 from the Bank of East Asia. In order to
J's Wedding Productions wants to expand. Suppose the company borrows $200,000 from the Bank of East Asia. In order to use this loan, the bank requires the current ratio of the business to be at least 1.5. The market has become increasingly competitive this year. Increases in promotional expenses significantly reduced the profit margin. At the year-end, the adjusted trial balance preliminary analysis shows the current ratio to be 1.40. In order not to violate the terms of the loan, the Chief Financial Officer (CFO) avoids making some adjustment entries, such as the accumulated salary payable and materials used during the year.
A. Explain how retraction of certain adjustment entries will result in an improvement in the current rate.
B. Is it ethical for the CFO to skip certain adjustment entries to comply with the terms of the loan? Identify relevant accounting principles to justify your answer.