One common problem with the current ratio is that it is susceptible to "window dressing". If prior to the end of the accounting period Streetwise Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to
A) pay off accounts payable prior to year end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.

Question

Quizplus · Accepted Answer

Paying off accounts payable prior to year end would reduce the current liabilities and increase the current assets, which would increase the current ratio. Purchasing more inventory, short-term investments or inventory with cash would increase the current assets, but it would also increase the current liabilities or reduce the cash, which may not significantly affect the current ratio or even decrease it. Therefore, paying off accounts payable is the best choice to artificially boost the current ratio. However, this practice does not reflect the company's true liquidity position and may mislead investors and creditors.

One Common Problem with the Current Ratio Is That It