Ethical Case - Related to Accounting Principles & Adjusting Entries Essay

Ethical Case - Related to Accounting Principles & Adjusting Entries - Essay Example In order to report a higher current ratio than the actual value, the company’s chief financial officer omitted some items such the accrued salary payable and supplies for the period. Based on the short case, two discussions will be prepared. The first discussion concerns whether failure to make adjustment entries would lead to an improvement in the current ratio. The second analysis shows whether it is ethical for such omissions to be made, and the relevant accounting principle involved. The current ratio is used to measure the ability of the company to meet all the current obligations using the current assets, and without exhausting the available current assets. The current ratio is obtained using the following formula = (current assets/current liabilities). J’s Wedding Production required current ratio of 1.5 means that the company’s current assets should cover the current liabilities 1.5 times before they are exhausted. Similarly, the actual current ratio of the business, 1.4 means that the current assets could cover the current liabilities 1.4 times before they are exhausted. The accrued salary payable and the supplies used during the year are categorized under liabilities and current assets respectively (Kapil, 2011). Their omission reduces the reported total current responsibility and also increases the stated amount of inventories (current assets) for the company. The total current liabilities are a factor of the current ratio. That is, current ratio = (current assets/current liabilities). Therefore, if the current liabilities are reduced by eliminating some liability items (the accrued salary payable) and the current assets increased by included the amount of inventories used during the period, the numerator element is increased while the denominator part is reduced, thus, leading to high current ratio (Kapil, 2011). Various users use the accounting information for different purposes. The user is the investors, the employees,