Which of the following statements is CORRECT?
A)Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."
B)Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
C)Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing."
D)Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
E)"Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.

Question

Quizplus · Accepted Answer

Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio, which is a short-term solvency ratio, but it does not address the underlying long-term financial health of the firm. This action can be considered an example of "window dressing," which is any action taken to artificially improve the appearance of the firm's financial statements without actually improving its long-term financial position.

Which of the Following Statements Is CORRECT