You, a CPA, are the accountant for ALFA Company, a sole proprietorship owned by Sal. You are finalizing the financial statements for the quarter ended September 30, 2019. The terms of the companys bank loan include requirements that ALFA maintain its current ratio above 2 and that the company provide the bank quarterly financial statements as well as annual financial statements.

The preliminary financial statements that you show to Sal include current assets of $240,000 and current liabilities of $160,000. Sal says, The current ratio is too low. I want you to include $160,000 cash from my personal bank account in the financial statements of ALFA. You tell Sal that would be a violation of generally accepted accounting principles (GAAP), but Sal says it is fine because the $160,000 cash will not be included in the annual December 31, 2019 financial statements.

Required

a. Explain the generally accepted accounting principle (GAAP) that would be violated by including $160,000 from Sals personal bank account in ALFAs September 30, 2019 financial statements. (2 points)

b. Explain whether you, a CPA, have any ethical issues associated with including the $160,000 from Sals personal bank account in ALFAs financial statements at September 30, 2019 (2 points).

c. Calculate ALFAs current ratio at September 30, 2019, before the $160,000 cash from Sals personal bank account is included. Calculate the current ratio if the $160,000 cash is included (2 points).

d. Identify what information a bank obtains by looking at the current ratio of a borrower. Briefly explain how this information would be misleading to the bank if the current ratio included the $160,000 of cash from Sals personal account (2 points).