CA Inter P6 · Chapter 3 · Question 9 of 9
A company makes a large repayment to creditors just before the year end, using a short-term loan that it takes again immediately after the year end, so that its current ratio looks better. This shows which limitation of ratio analysis?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Ratios can be distorted by window dressing of year-end figures
Explanation
Ratios are based on balance sheet figures at a single date, so management can change transactions around the reporting date to improve the reported position. This is called window dressing. Inflation is a separate limitation. Ratios are quantitative, and they can still be calculated for loss-making firms.
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