You observe that a company's current ratio is dramatically increasing. This may indicate fraud in that:
A) Contingent liabilities are not recorded.
B) Accounts payable is understated.
C) Expenses have been inappropriately capitalized as assets.
D) Fixed assets are overstated.

Question

Quizplus · Accepted Answer

A: No ratios apply here; documentary symptoms must reveal this fraud.
B: AP is part of current liabilities, which is the denominator in the current ratio. If AP gets smaller and current assets stay the same, this ratio will increase.
C: These assets would be in some deferred charge or intangible asset account - no current assets or current liabilities would be affected.
D: PP&E is not a current asset and thus would have no effect on current ratio.

You Observe That a Company's Current Ratio Is Dramatically Increasing