Safeco's Current Assets Total to $20 Million Versus $10 Million

question 40

Multiple Choice

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

• A)The transactions would raise Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
• B)The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
• C)The transaction would have no effect on the firm' financial strength as measured by their current ratios.
• D)The transaction would lower both firm' financial strength as measured by their current ratios.
• E)The transaction would improve both firms' financial strength as measured by their current ratios.

---

Definitions:

Present Values

The value today of a future sum of money or cash flows, when calculated at an agreed-upon return rate.

Present Value

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Interest Rate

The percentage charged on borrowed money, or earned through deposited funds, over a period of time.

Lottery

A form of gambling that involves the drawing of numbers at random for a prize.