What Effect will reclassifying the investments have on the current ratio? Is Ross's actual financial position stronger as a result of reclassifying the expenditures?
The effect the investment will face will be both short and long-term. The short-term the investment will meet are the obligations that were set to mature within one year or below. The long-team are the requirements are the finances that are expected to develop within a period not less than one year from the date the balance sheet was prepared. Refinancing the enterprise short term balance sheet or replacing it with the long-term obligation will cause an uninterrupted period beyond one year ( Koyuncugil & Ozgulbas, 2012) . Reclassifying the long term investments at the company R increased the amount of the current assets; therefore, increasing the ratio.
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Ross's financial position is stronger due to the changes in the customer's consumption. The strength is also caused by the current ration of Company R. The best tool for companies to use in strengthening their financial weakness is through ratio analysis ( Berkmen, Gelos, Rennhack & Walsh, 2012) . The ratio helps the organization to make better decisions in the future. The rate also provides a clear progress the Company has made, and they can predict the future. The Company will quickly analyze both short term and long term obligations of the Company. Therefore, Ross should use the ratio analyses that are predictable to improve the capacity of consumption. The improvement will have to meet the future financial expectations of the Company. Ross's Company's' current financial position is not clear as she says the customer is becoming difficult to attract even though the ration is an indication of substantial financial obligations.
The ratio analysis is the best method an institution can use to analyze their financial statements. According to Berkmen et al. (2012), companies with good debt ratings can access the public bond market in the market compared to others. At the same time, these institutions are allowed to borrow a lot of money due to their excellent past credit record. For Company R to access the bond market, they will include their rating indicator variables, which are similar to that of the institution with the debt rating provided by the Standard & Poor's zero. Company R will have to include its earnings volatility for them to gain business variability. The business variability is usually measured as a standard deviation of the Company about the ratio within their past five years.
Shortly after the financial statements are released, sales improve, so, too, does the current ratio. As a result, Ross's management decides not to sell the investments it had reclassified as short-term. Accordingly, the Company reclassifies the stakes in the long-term. Has administration behaved unethically? Give the reasoning underlying your answer.
The managers changed their minds about selling some of the assets. Their intentions might have been honest for them to meet the necessary obligations for the Company to keep moving forward. Short term debt in any organization including the Ross's investments, can easily trigger off the liquidation risk ( Berkmen et al., 2012). Liquidation risk is where the organization faces financial risk within a short period. The Company might give an asset or a commodity as a security to be traded quickly without influencing the prices at the market. Therefore companies that have room for growth like Company R might have uncertain cash flow. The unpredictable cash flow on short term debts might lead to low options for growth ( Koyuncugil & Ozgulbas, 2012) . Reclassifying the long term type of investment at the moment at stake can link with the agreement of the obligations. The debt does not qualify the managers to consider as unethical. Therefore, the company managers took the right and appropriate action of changing the decision of not selling the assets.
The decision of the managers to reclassify the obligations into the long term might prove that the managers might plat the game of shell at some point in an organization. However, according to Ross's case, reclassification led to the improvement of the current ratio. The current state is safe, and Ross does not need to sell the investments in any way. They will try and operate the financing for the next year and compare the results after that; they can decide to shift to the long term.
According to Koyuncugil and Ozgulbas, (2012), the large of principal financial officers will go for the short term debts compared to the long term debts. Some of the reasons include, the short term debts have lower interest compared to long term rates. Therefore, the short term debt serves the right purpose for investments. The higher term has the best economic prospect, which improves the maturity faster. When an institution borrows the long term debts, they are most likely not to get their returns more quickly. The long term will cause the spread of the adverse effects on the debt borrowed, which becomes a significant risk. Therefore, it is clear that the debt terms spread the risks in the market generally.
References
Berkmen, S. P., Gelos, G., Rennhack, R., & Walsh, J. P. (2012). The global financial crisis: Explaining cross-country differences in the output impact. Journal of International Money and Finance , 31 (1), 42-59.
. Financial early warning system model and data mining application for risk detection. Expert systems with Applications , 39 (6), 6238-6253.
