Fraudulent accounting just described affect current ratio

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Larry Bush, was on his second audit job on the East Coast with a new client called FSK. He was looking through the past four years of financials and doing a few ratios when he noticed something odd. The current ratio went from 1.9 in 2011 down to 0.3 in 2012, despite the fact that 2012 had record income. He decided to sample a few transactions from December 2012. He found that many of FSK customers had returned products to the company because of substandard quality. Bush discovered that the company was clearing the receivables but stashing the debits in an obscure long-term asset account called "grain reserves" to keep the company's income "in the black". How did the fraudulent accounting just described affect the current ratio? Can you think of any reasons why someone in the company would want to take this kind of action?

Reference no: EM13853322

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