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, (i) determine whether reported liquidity, as measured by the quick ratio and working capital, is improved and (ii) 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 immediately prior to each transaction.
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 the current portion of long- term debt as long term as a 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 trade payables.
e. Entered into a borrowing agreement that allows the company to borrow up to $ 10 million when needed.
f. Required all employees to take accrued vacation to reduce its liability for vacation compensation.