Assume that a company has a current ratio of 3. Failure to record estimated warranty costs will cause the current ratio to be
A)overstated.
B)understated.
C)unchanged since the effects offset one another.
D)unchanged since it has no impact on any current asset or liability accounts.

Question

Quizplus · Accepted Answer

Failure to record estimated warranty costs results in an understatement of current liabilities, leading to an overstated current ratio. The current ratio is calculated as current assets divided by current liabilities; thus, if liabilities are understated, the ratio will appear higher than it should be.

Assume That a Company Has a Current Ratio of 3