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Mermaid LTD's long term debt agreements make certain demands onthe business. For example, Mermaid may not purchase treasury sharesin excess of the balance of retained earnings. Also, long term debtmay not exceed shareholder's equity, and the current ratio may notfall below 1.50. If Mermaid fails to meet any of theserequirements, the Company's lenders have the Authority to take overmanagement of the company.

Changes in consumer demand have made it hard for Mermaid LTD toattract customers. Current liabilities have mounted faster thancurrent asset, causing the current ratio to decline to 1.47. Beforereleasing financial statements , Mermaid's management is scramblingto improve current ratio. The controller points out that theCompany owns an investment that is currently classified as longterm. The investment can be classified as either long-term or short- term, depending on management's intention. By deciding to convertthe investment as short-term --- a current asset. On thecontroller's recommendation, Mermaid's Board of Directors votes toreclassify Long-term investments as short-term.

Required:

1. What is accounting issue in this case? What ethical decisionneeds to be made?

2. Who are the stakeholders?

3. Analyse the potential impact on the stakeholders from thefollowing standpoints:

3.1 Economic

3.2 Legal

3.3 Ethical

4. Shortly after the financial statements are released, salesimprove; so, too, does the current ratio. As a result, Mermaid'smanagement decides not to sell the investments it had reclassifiedas short-term. Accordingly, the company reclassifies theinvestments as long-term. Has management acted unethically? Givereasons underlying your answer.