Management can take deliberate steps to produce a financial statement that presents a better current ratio at the balance sheet date than the average, or normal, current ratio during the rest of the year. Analysts refer to such actions as window dressing:
A)near the end of its accounting period a firm might delay normal purchases on account.
B)hasten the collections of a loan receivable, classified as noncurrent assets, and use the proceeds to reduce current liabilities.
C)near the end of its accounting period a firm might accelerate normal purchases on account.
D)hasten the collections of a loan receivable, classified as current assets, and use the proceeds to reduce long-term liabilities.
E)choices a and b.

Question

Quizplus · Accepted Answer

Both choices a and b are examples of actions that management can take to improve the current ratio at the balance sheet date. By delaying normal purchases on account or collecting a loan receivable and using the proceeds to reduce current liabilities, the firm can temporarily improve its current ratio. However, these actions do not necessarily reflect the true operating performance and financial health of the company and are therefore considered window dressing.

Management Can Take Deliberate Steps to Produce a Financial Statement