You are studying with some classmates, and you are reviewing each other’s responses to the following question:

“If a company failed to reclassify the current portion of its long-term debt, what implications would this have for the company’s financial statements? How would this affect the company’s current and quick ratios?”

Your classmate responds as follows:

“The reclassification of the current portion of long-term debt changes this portion of the liability from current to long-term. This is important because if it were not done, users of the financial statements would not be able to estimate the expected cash outflows for the following year. By failing to make the reclassification entry, the company’s current liabilities would be understated (perhaps by a significant amount), while its long-term liabilities would be overstated. Total liabilities would be correct with or without the reclassification entry being made. Without the reclassification entry, the company’s working capital would appear weaker than it actually is. The current ratio would be lower than it should be because current liabilities are understated.”

Required

a. Identify three things in your classmate’s answer that are correct.

b. Identify three things in your classmate’s answer that are incorrect.