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Homework answers ch10

Homework answers ch10 - Chapter 10 25"Window dressing...

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Chapter 10 25. "Window dressing" refers to the adjustment of yearend account balances of current assets and liabilities to show a more favorable current ratio than is otherwise warranted. This can be accomplished, for example, by temporarily stepping up the efforts for collection, by temporarily recalling advances and loans to officers, and by reducing inventory to below the normal level and use the proceeds from these steps to pay off current liabilities. The analyst should go beyond yearend reported amounts and try to obtain as many interim readings of the current ratio as possible. Even if the yearend current ratio is very strong, interim ratios may reveal that the company is dangerously close to insolvency. More generally, our analysis must always be aware of the possibility of window dressing of both current and noncurrent accounts. 26. The rule of thumb regarding the current ratio is 2:1 — a value below that level suggests serious liquidity risk. Also, the rule of thumb suggests that the higher the current ratio be above the 2:1 level, the better. The following points, however, should be kept in mind so as
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