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.

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Definitions:

Reconciling Items

Entries made to adjust or reconcile differences between two sets of records or accounts.

Bank Statement

A document provided by a bank that summarizes an account holder's financial transactions and balances over a specified period, typically monthly.

Cash Balance

The amount of cash that a company or an individual has available at any given time.

Journal Entry

An accounting record of a transaction where the total amounts in the debit and credit columns are equal.