ETHICS AND GOVERNANCE LOAN COVENANTS Sharon Rock, assistant account for Brady Industrial Products, was discussing the finalization of the financial statements of the business as at 30 June 2018 with the accountant of business, Tim O’Shea. Both agreed that everything appeared to be in order. Sharon, however, had notice that a large loan had been taken out by the owner with Localtown Bank and that, as part of the loan agreement , Brady Industrial Products was to maintain a ratio of current assets (less inventories) to current liabilities of at least 1.2:1.The relevant figures prepared showed current assets (less inventories) standing at $1100000, whereas current liabilities stood at $1000000, Sharon raised her concerns with Tim O’Shea about not maintaining the desired minimum ratio for the purpose of the loan agreement, Tim O’ Shea about not maintain the desired minimum ratio for the purpose of the loan agreement. Tim replied: ‘YES,we can see the potential problem here. We could,we suppose, sell some inventory or put pressure on some trade debtors to pay up, but we may not have the time to get the ratio right for the bank’s information. The bank will want 30 June figures.’ Tim thought about the problem a little further and then explained; I have better solution. There is a large loan of $120000 which the business has made to the owner. This is currently classified as non- current receivable as the loan is not due for repayment for another 14months. This probably close enough to be a current receivable, so let us simply reclassify the loan to the owner as a current receivable and this will overcome the potential problem with the bank’s ratio requirement. we am sure the owner will agree with me on this.’ Q. What are the main ethical issues involved?
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