Reference no: EM132721893

Angela Gore is CFO of Bahamas Boat Company. The company designs and manufactures luxury boats. It's near year-end, and Angela is feeling kind of queasy. The economy is in a recession, and demand for luxury boats is way down. Angela did some preliminary liquidity analysis and noted the company's current ratio is slightly below the 1.2 minimum stated in its debt covenant with Key Bank. Angela realizes that if the company reports a current ratio below 1.2 at year-end, the company runs the risk that Key Bank will call its $10 million loan. She just cannot let that happen.

• Bahamas Boat Company has current assets of $12 million and current liabilities of $10.1 million. Angela decides to delay the delivery of $1 million in inventory purchased on account from the originally scheduled date of December 26 to a new arrival date of January 3. This maneuver will decrease inventory and accounts payable by $1 million at December year-end. Angela believes the company can somehow get by without the added inventory, as manufacturing slows down some during the holiday season.

Required:

Problem 1. How will the delay in the delivery of $1 million in inventory purchased on account affect the company's current ratio on December 31? Provide supporting calculations of the current ratio before and after this proposed delivery delay.

Problem 2. Is this practice ethical? Provide arguments both for and against.