Dolly Harding owns and operates Dolly Jos Caf. Dolly has requested a credit application from LRM, Inc., a major food supplier from which she hopes to begin purchasing inventory. LRM, Inc., has requested that Dolly submit a full set of financial statements for Dolly Jos Caf with the credit application. Dolly is concerned because the most recent balance sheet for Dolly Jos Caf reflects a current ratio (current assets divided by current liabilities) of 1.24. Dolly has heard that most creditors like to see a current ratio that is 1.5 or higher. To increase Dolly Jos Cafs current ratio, Dolly has convinced her parents to loan the business $25,000 through an 18-month long-term note payable. Dollys parents are apprehensive about having their money tied up for over a year. Dolly reassured them that even though the loan is for 18 months, Dolly Jos Caf can, and probably will, repay the $25,000 sooner.

Requirements

1. Discuss the ethical issues related to the loan from Dollys parents.

2. Why do you think creditors like to see current ratios of 1.5 or higher?