Window dressing of current ratio

Answer 1

"Window dressing" is a term applied in describing actions by organizations to cause their reports of financial performance and financial position to portray the organizations' financial performance and financial position as better than they actually are. The practices used to include "window dressing" in an organization's financial statements range from the flagrantly illegal to questionable legality but certainly unethical.

An organization can improve its measures of short-term liquidity by manipulating the current ratio. By way of illustration, a company can obtain a long-term loan near the end of a financial reporting period. The cash received from the loan will inflate current assets, but on the liability side, the loan will be recorded as a long-term debt. The overall financial position of the company has not changed (with the exception of incurring an interest obligation); however, the company's short-term liquidity position (as measured by the current ratio) will be improved for the upcoming financial statement reports. After the financial reports are issued, the company can repay the loan at minimal interest expense. This sort of window dressing will mislead some investors, lenders, and creditors.

Another approach to window dressing is to manipulate expenses, sales, or both to improve a company's income statement. In this approach to window dressing, a first may report expenses as deferred to a future reporting period when the pa