Summery

Ethical Dilemma The Raintree Cosmetic Company has several loans outstanding with a local bank. The debt agreements all contain a covenant stipulating that Raintree must maintain a current ratio of at least 0.9. Jackson Phillips, company controller, estimates that the 2016 year-end current assets and current liabilities will be $2,100,000 and $2,400,000, respectively. These estimates provide a current ratio of only 0.875. Violation of the debt agreement will increase Raintree's borrowing costs as the loans are renegotiated at higher rates. Jackson proposes to the company president that Raintree purchase inventory of $600,000 on credit before year-end. This will cause both current assets and current liabilities to increase by the same amount, but the current ratio will increase to 0.9. The extra $600,000 in inventory will be used over the later part of 2017. However, the purchase will cause warehousing costs and financing costs to increase Read through the scenario presented there. Consider both the pros and cons and be prepared to argue in favor of Jackson Phillips's proposal to increase the company's current ratio. Remember to use logic and the accounting principles you have learned thus far to develop your argument. Present at least three points as to why this route is the best route to go (with one of those points being related to the learned accounting principles). Then we will flip the switch and you will argue AGAINST Jackson Phillips's proposal to increase the company's current ratio. Be sure to state why the route you suggest is best and try to include counter arguments to the point(s) made in the original stance