If the management of an entity is close to breaching a debt covenant that requires maintaining a certain current ratio, management may have an incentive to ________.
A)either overstate current assets or understate current liabilities
B)understate either current assets or current liabilities
C)overstate either current assets or current liabilities
D)either understate current assets or overstate current liabilities

Question

Quizplus · Accepted Answer

To avoid breaching a debt covenant that requires maintaining a certain current ratio, management may have an incentive to either overstate current assets or understate current liabilities. This would artificially improve the current ratio, making the company's financial position appear stronger than it actually is.

If the Management of an Entity Is Close to Breaching