Discuss two questions.

1. Topic: Relation between Current Ratio and Quick Ratio.

A firm has experienced a decrease in its current ratio but an increase in its quick ratio during the last three years. What is the likely explanation for these results?

2. Topic: Incentives to Manage the Balance Sheet.

Assume that a corporation needs to enter the private debt market to raise funds for plant expansion. The corporation expects debt covenants to place restrictions on the levels of its current ratio and total-liabilities-to-assets ratio. Considering the accounts that comprise these ratios, give examples of accounting estimates, accounting judgments, and structured transactions that the lender should examine closely.

Attention: Two short discussion questions, not whole essays! Do not write long pages.

Answers should be answered respectively.

Questions are concerned to the topic.

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