Question

If a company takes a restructuring charge frequently, it may be trying to make its

A current ratio appear better than it truly is.

B sustainable income appear greater than it truly is.

C cash flow from financing appear lower than it truly is.

D cash flow from operating activities appear higher than it truly is.

Answer 1

Restructuring is the action taken by management of the company to change company’s operational, financial or structural conditions   in order to make the company more profitable. It usually happens when company is facing financial problems.

Company may restructure its operations by cutting costs or changing line of business ie,by expanding one unit which is rendering profits and closing unit which is resulting in losses. It may also do financial restructuring by either making debts repayment obligation for a longer duration instead of shorter or by asking debt holders to convert debts obligation into equity shares.

In this question option A is correct which means current ratio looks better than what it is.

A current ratio= current assets/ current laibilites. If company’s undergo financial restructuring , debt obligations may change into shares if bond holders take shares instead of paying back loan .Thus resulting in reducing current liabilities.. If we see formula current liabilities is in denominator and if current liabilities reduce , current ratio would be better as compared to situation before restructuring.