Turnberry Golf Corporation’s long-term debt agreements make certain demands on the business. For example, Turnberry may not purchase treasury shares in excess of the balance of retained earnings. Also, long-term debt may not exceed shareholders’ equity, and the current ratio may not fall below 1.50. If Turnberry 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 Turnberry to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Turnberry’s management is scrambling to improve the current ratio. The controller points out that the company owns an investment that is currently classified as long-term. The 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, Turnberry can classify the investment as short-term—a current asset. On the controller’s recommendation, Turnberry’s board of directors votes to reclassify long-term investments as short-term.

Requirements 1. What is the accounting issue in this case? What ethical decision needs to be made?

2. Who are the stakeholders?

3. Analyze the potential impact on the stakeholders from the following standpoints:

(a) economic,

(b) legal, and

(c) ethical.

4. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Turnberry’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 acted unethically? Give the reasoning underlying your answer.