One Common Problem with the Current Ratio Is That It

question 80

Multiple Choice

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon 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.

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Definitions:

Time

A measurable period during which events occur, processes take place, or conditions exist.

Slope

In mathematics and economics, it's the measure of the steepness or incline, often used to describe a change in a variable in relation to a change in another variable.

45-degree Line

In economics, a reference line that represents where the quantity demanded equals the quantity supplied.

Indeterminate

A state in which something cannot be exactly established, known, or decided.