Question

If the management of an entity is close to breaching a debt covenant that requires maintaining a certain current ratio, management may have an incentive to ________. overstate either current assets or current liabilities understate either current assets or current liabilities either overstate current assets or understate current liabilities either understate current assets or overstate current liabilities

Answer 1

Answer: either overstate current assets or understate current liabilities

Step-by-step explanation:

The Current ratio is calculated by dividing Current Assets by Current Liabilities. This means that when a company has either higher current assets or lower current liabilities, the Current ratio will be higher.

In this case therefore, if management wants to ensure that a current ratio is maintained and does not fall, they might either overstate current assets or understate current liabilities so that the Current ratio is high enough to remain above a certain level.