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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.