Revenue Recording and Current Ratio
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A company has borrowed $3,000,000 to expand its production plant. As a condition for the loan, the bank has required that the company maintain a Current Ratio (current assets divided by total current liabilities) of at least 1.50. On December 15th, the company comptroller reports that the costs of expansion have brought the current ratio down to 1.40. The Board is considering what might happen if the business reports this ratio to the bank. One solution is to report revenue from a new sales contract that is scheduled to take effect in January.
How would recording this revenue in December affect the current ratio?
Is it ethical to record the revenue transaction in December?
What accounting principle is relevant to this situation?
What course of action should the company take?
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Solution Summary
This brief solution address how recording the revenue in December would affect the company in terms of current ratio, ethics, accounting principles and suggests what course of action the company should take.
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How would recording this revenue in December affect the current ratio?
It will increase the current ratio as this will increase the current assets.
Is it ethical to record the revenue transaction in December?
No its not ethical to record the revenue transaction in December as its happening in January.
What accounting principle is ...
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