Which of the following statements is CORRECT? a. Using some of the firm\'s cash

Question

Which of the following statements is CORRECT?

a. Using some of the firm's cash to reduce long-term debt is an example of "window dressing." b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." d. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. e. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."

Explanation / Answer

Answer is b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

Window dressing refers to the actions taken to make the financial statements of the company look attractive. It is done with the intention to lure potential investors and is done only for a short time.

In this question, all other cases are of routine operations and will not amount of window dressing. However, in case of availing long term borrowings to pay short term debt is clearly an action taken to improve the liquidity of the company for a short period of time.

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