Question

Today's Fashions has a debt that has been properly reported as long-term debt before this year. Part of this debt is due this year. If Today's Fashions continues to report the current position of the debt as a long-term liability, then ______

Answer 1

Current ratio will be overstated

Step-by-step explanation:

Current ratio measures the short term solvency of a firm. In other words, it measures the ability of the firm to meet its current obligations. It is the ratio of current assets to current liabilities.

A part of long term liability that is to be paid this year is considered current liabilities. If today's fashion continues to report debt due in the current year as long term liability, then current liabilities reported would be lesser than the actual position. As such, current ratio calculated would be higher than what it is actually. So, current ratio will be overstated in this case.