Question: Harrenhal Inc.'s long-term debt agreements make specific demands on the business. For example, Harrenhal may not purchase treasury stock in excess of the balance of

Harrenhal Inc.'s long-term debt agreements make specific demands on the business. For example, Harrenhal may not purchase treasury stock in excess of the balance of retained earnings. In addition, long-term debt may not exceed stockholders' equity, and the current ratio may not fall below 1.50. If Harrenhal fails to meet any of these requirements, the company's lenders have the authority to take over the management of the company.
Changes in consumer demand have made it hard for Harrenhal to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Harrenhal's management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long term or short term, depending on the management's intention. By deciding to convert an investment to cash within one year, Harrenhal can classify the investment as short-term-a current asset. On the controller's recommendation, Harrenhal's board of directors votes to reclassify long-term investments as short term.
Based on this information, discuss the effect of reclassifying investments on the current ratio. Is Harrenhal's true financial position stronger because of reclassifying the investments? Why or why not?

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