Arthur Chen, a newly qualified accountant, was on his second
audit job in a country area with a new client called Parson Farm
Products. He was looking through the last four years of financials
and doing a few ratios, when he noticed something odd. The current
ratio went from 1.9 in 2009 down to 0.3 in 2010, despite the fact
that 2010 had record income. He decided to sample a few
transactions from December 2010. He found that many of Parsonâ€™s
customers had returned products to the firm because of substandard
quality. Chen discovered that the business was clearing the
receivables (that is, crediting accounts receivable) but hiding the
debits in an obscure non-current asset account called â€˜grain
reservesâ€™ to keep the firmâ€™s income â€˜in the blackâ€™ (that
is, positive income).
Requirment: 1- How did the fraudulent accounting just described affect the current ratio?
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