Accounting method for current liabilities
The liability side of the balance sheet of any company are divided into non-current liabilities and current liabilities. The current liabilities are those obligations that are payable within the period of one year and will be paid off through the available current liabilities. If the investment of Ross’s Lipstick Company is reclassified as current asset from the non-current asset, then the current ratio of the company will increase, which in turn will improve current ratio position of the company (Weil, Schipper & Francis, 2013). For instance, if the current asset of the company is $100,000 and the current liabilities are $ 50,000, then the current ratio will be $100,000/$50,000 = 2. Due to reclassification of investment, the current assets will become $125,000 and the current ratio then will be $125,000/$50,000 = 2.5. Therefore, the true financial position of the company will become stronger owing to the reclassification of investment from non-current asset to current asset.
Financing of the operation through the long-term liabilities
Long-term liabilities of any company are the obligations that are to be paid beyond the operating cycle or one year period. The long-term obligations include debt such as bonds. Bonds are the debts generally issued to the investor group or to the public. It allows the holders of the bond to redeem for the common shares or the bond which are issues in association with the warrants to buy the stock (Pollard, 2015). Bonds has its own advantages as compared to stocks like it is comparatively less volatile, highly liquid, provides legal protection and have various forms of term structures. However, the bonds are exposed to various risks like prepayment risk, reinvestment risk, interest rate risk, credit risk and liquidity risk.
Significance of ratio analysis for decision-making
Ratio analysis is the tool for the financial analysis that provides the analyst to evaluate the financial position of the company. Ratios are capable to communicate the required information to the users of the financial statement in easy and simple manner to take them decisions regarding investment or financial planning. Further, the financial statement includes wide range of data that may be confusing for the user (Delen, Kuzey & Uyar, 2013). Therefore, ratios help the user to focus on the areas that requires attention and taking corrective measures for decision making.
Reclassification of investment after release of financial statement
The decision regarding whether the investment is to be classified as long-term or short-term has impact on the balance sheet for the way they are valued. If the investment is classified as short-term, then it will be valued as marked to market and any decrease in value are recognized as loss. However, the increase, if any, in the value are recognized only at the time of sale (Ford, 2017). Therefore, the classification of investment in the balance sheet as long-term or short-term has direct impact on the net income of the company reported in the income statement. Therefore, the decision of management regarding reclassification of investment is unethical.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Ford, G. S. (2017). Reclassification and Investment: An Analysis of Free Press’'It's Working'Report.
Pollard, R. B. (2015). Feeling Insecure-A State View of Whether Investors in Municipal General Obligation Bonds Have a Mere Promise to Pay or a Binding Obligation.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.