Lola the CEO of JB Inc and Frank the accountant

Lola, the CEO of JB Inc., and Frank, the accountant for JB Inc., were recently having a meeting
to discuss the upcoming release of the company’s financial statements. Following is an excerpt
of their conversation: Lola: These financial statements don’t show the hours of hard work that
we’ve put in to restore this company to financial health. In fact, these results may actually
prevent us from obtaining loans that are critical to our future.

Frank: Accounting does allow for judgment. Tell me your primary concerns and let’s see if we
can work something out.

Lola: My first concern is that the company doesn’t appear very liquid. As you can see, our
current assets are only slightly more than current liabilities. The company has always paid its
bills—even when cash was tight. It’s not really fair that the financial statements don’t reflect this.

Frank: Well, we could reclassify some of the long-term investments as current assets instead of
noncurrent assets. Our expectation is that we will hold these investments for several years, but
we could sell them at any time; therefore, it’s fair to count these as current assets. We could
also reclassify some of the accounts payable as noncurrent. Even though we expect to pay
them within the next year, no one will ever look close enough to see what we’ve done.
Together these two changes should make us appear more liquid and properly reflect the hard
work we’ve done. Lola: I agree. However, if we make these changes, our long-term assets will
be smaller and our long-term debt will be larger. Many analysts may view this as a sign of
financial trouble. Isn’t there something we can do?

Frank: Our long-term assets are undervalued. Many were purchased years ago and recorded at
historical cost. However, companies that bought similar assets are allowed to record them at an
amount closer to their current market values. I’ve always thought this was misleading. If we
increase the value of these long-term assets to their market value, this should provide the users
of the financial statements with more relevant information and solve our problem, too. Lola:
Brilliant! Let’s implement these actions quickly and get back to work.

Required:

Describe any ethical issues that have arisen as the result of Lola and Frank’s conversation.

Lola the CEO of JB Inc and Frank the accountant

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accountant/

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