Assignment 3: Research Application Discussion
The current ratio measures the degree to which current assets cover current liabilities. A high ratio indicates a good probability that the company can retire current debt.
When long term debt exceeds stockholder’s equity, the current ratio will fall. What effect will reclassifying a long term investment into cash within one year have on the current ratio? Is a firm’s true financial position stronger as a result of reclassifying investments? What are the ethical ramifications of re-classifying investments?
Give an example of when reclassifying a long term investment as a short term investment makes financial sense for the company.