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.

Question

Quizplus · Accepted Answer

Paying off accounts payable prior to year-end would increase the current ratio as it would reduce current liabilities, but this is a form of "window dressing" as it does not necessarily reflect the true liquidity of the company. Purchasing more inventory on account or with cash, as well as purchasing short-term investments with cash would increase current assets but not necessarily improve liquidity.

One Common Problem with the Current Ratio Is That It