Question 1 Mermaid Ltd.s long-term debt agreements make certain demands on the business. For example, Mermaid 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 Mermaid fails to meet any of these requirements, the companys lenders have the authority to take over management of the company. Changes in consumer demand have made it hard for Mermaid Ltd to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to decline to 1.47. Before releasing the financial statements, Mermaids 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 managements intention. By deciding to convert an investment to cash within one year, Mermaid can classify the investment as short-term a current asset. On the controllers recommendation, Mermaids board of directors votes to reclassify long-term investments as short-term.

Requirements: a) What is the accounting issue in this case? What ethical decision needs to be made? (5 marks)

b) Who are the stakeholders? (5 marks)

c) Analyse the potential impact on the stakeholders from the following standpoints:

- Economic (2 marks)

- Legal (2 marks)

- Ethical (2 marks)

d) Shortly after the financial statements are released, sales improve; so, too, does the current ratio. s a result, Mermaids 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. (9 marks)