In some cases, a manager can engage in transactions that improve the appearance of financial reports without affecting the underlying economic reality. In this chapter, we discussed the importance of liquidity as measured by the quick ratio and working capital. For each of the following transactions,
(a) Determine whether reported liquidity is improved and
(b) State whether you believe that the fundamental liquidity of the company has been improved. Assume that the company has positive working capital and a quick ratio of 0.5.
a. Borrowed $1 million from the bank, payable in 90 days.
b. Borrowed $10 million with a long-term note, payable in five years.
c. Reclassified current portion of long-term debt as long term as the result of a new agreement with the bank that guarantees the company’s ability to refinance the debt when it matures.
d. Paid $100,000 of the company’s accounts payable.
e. Entered a borrowing agreement that guarantees the ability to borrow up to $10 million when needed.